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The co-insurance effect hypothesis and the cost of bank loans: Evidence from Indonesian pyramidal business groups

Yane Chandera, Cynthia Afriani Utama, Zaäfri Ananto Husodo and Lukas Setia-Atmaja

Global Finance Journal, 2018, vol. 37, issue C, 100-122

Abstract: This paper empirically tests the relationship between the position of a firm in a pyramidal business group and the firm's bank loan spread, in an Asian emerging market with a high incidence of pyramidal firms, a weak legal system, and high corporate dependency on bank loans. We use a data set of bank loan contracts for Indonesian pyramidal firms from 2006 to 2016. We find that banks charge lower loan prices to firms that are located in lower layers of a pyramidal chain, even after we control for many factors including expropriation risk. The finding suggests that banks consider that lower-layer firms receive a greater co-insurance effect than upper-layer firms because more internal resources are available down the ownership chain to lower credit risk.

Keywords: Business group; Pyramid; Co-insurance effect; Cost of debt; Bank loan (search for similar items in EconPapers)
JEL-codes: G21 G32 G34 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.gfj.2018.03.003

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