Is Borrowing from Banks More Expensive than Borrowing from the Market?

Michael Schwert

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: This paper investigates the pricing of bank loans relative to the borrower's existing public bonds. After accounting for seniority, banks earn an economically large premium relative to the market price of credit risk. To quantify the premium, I apply a structural model that accounts for priority structure, prices the firm's bonds, and matches expected losses given default and secondary market bid-ask spreads. In a sample of secured term loans to non-investment-grade firms, banks earn an average rate premium of 143 bps, equal to 43% of the all-in-drawn spread. This paper provides novel evidence of firms' willingness to pay for the special qualities of bank loans.

JEL-codes: G12 G21 G32 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-23

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