Regulation and information costs of sovereign distress: Evidence from corporate lending markets

Iftekhar Hasan, Suk-Joong Kim, Panagiotis N. Politsidis () and Eliza Wu
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Suk-Joong Kim: The University of Sydney
Panagiotis N. Politsidis: Audencia Business School

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Abstract: We examine the effect of sovereign credit impairments on the pricing of syndicated loans following rating downgrades in the borrowing firms' countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionately adverse impact on the bounded firms' borrowing costs relative to other domestic firms following their sovereign's rating downgrade. Rating-based regulatory frictions partially explain our results. On the supply-side, loans carry a higher spread when granted from low-capital banks, non-bank lenders, and banks with high market power. We further document an operating demand-side channel, contingent on borrowers' size, financial constraints, and global diversification. Our results can be attributed to the relative bargaining power between lenders and borrowers: relationship borrowers and non-bank dependent borrowers with alternative financing sources are much less affected.

Keywords: "Credit; ratings"; "Sovereign; ceiling"; "Syndicated; loan; pricing"; "Rating-based; regulation"; "Firm; credit; constraints"; "Bank; dependency"; "Bargaining; power" (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg and nep-ifn
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Published in Journal of Corporate Finance, 2023, 82, pp.102468. ⟨10.1016/j.jcorpfin.2023.102468⟩

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Journal Article: Regulation and information costs of sovereign distress: Evidence from corporate lending markets (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04227054

DOI: 10.1016/j.jcorpfin.2023.102468

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