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The impact of sovereign rating changes on European syndicated loan spreads: The role of the rating-based regulation

Danilo Drago and Raffaele Gallo

Journal of International Money and Finance, 2017, vol. 73, issue PA, 213-231

Abstract: We analyze the impact of sovereign rating changes on European corporate loan spreads. We demonstrate that sovereign downgrades lead to significant increases in the spread of loans to domestic firms. We find evidence that the negative effects of a sovereign downgrade are widespread across all firms, also unrated, which are the majority of firms in the European syndicated loan market. A relevant part of this impact depends on the reliance of financial regulation on credit ratings (certification effect), which reduces also loan size and leads to additional burdens for investment grade firms. Instead, we do not find evidence of a significant impact generated by an upgrade. Our results hold also controlling for the sovereign risk, crisis periods, lender characteristics, and endogeneity of loan contract terms.

Keywords: Sovereign credit rating; Loan spread; Financial regulation; Certification effect; Bank credit supply (search for similar items in EconPapers)
JEL-codes: G24 G28 G32 H63 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jimonfin.2017.02.029

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