Offshore operations and bank loan contracting: Evidence from firms that set up subsidiaries in offshore financial centers

Wenxia Ge, Jeong-Bon Kim, Tiemei Li and Yutao Li

Journal of Corporate Finance, 2016, vol. 37, issue C, 335-355

Abstract: We examine the effects of a multinational firm's subsidiary operations in offshore financial centers (OFCs) on bank loan contracting terms. Using a propensity score matched cross-country sample of firms with and without OFC subsidiaries, we find that firms with OFC subsidiaries receive less favorable loan terms than firms without OFC subsidiaries. The results from a difference-in-differences analysis and an analysis of a firm's mutation from a non-OFC firm to an OFC firm support the causal effect of offshore operations on the unfavorable loan terms. Furthermore, focusing on firms with OFC subsidiaries, we find that the intensity of offshore operations affects loan terms unfavorably. We also find that the unfavorable effect is more pronounced for more opaque firms and for firms that are headquartered in countries or jurisdictions with weaker legal enforcement. Our findings indicate that banks view offshore operations of borrowers as a credit risk-increasing factor.

Keywords: Offshore operation; Offshore financial center; Loan contracting; Information risk; Agency problem; Legal enforcement (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 G21 G32 K22 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:37:y:2016:i:c:p:335-355

DOI: 10.1016/j.jcorpfin.2016.01.006

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