Is unsystematic risk priced in bank loan contracts?

Margot Quijano

Applied Economics Letters, 2013, vol. 20, issue 13, 1233-1237

Abstract: We demonstrate that a firm's unsystematic risk is positively related to its cost of bank debt. A borrower's unsystematic risk needs to be costly monitored by the lender and some of this cost is included in the bank contract. A one SD increase in unsystematic risk results in a 14.0--19.5% increase in the cost of the loan, or 24--34 basis points for the median loan. Our results complement recent literature about the relevance of unsystematic risk and its effect on the cost of capital of corporations.

Date: 2013
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DOI: 10.1080/13504851.2013.799750

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