Gambling preference, information risk, and the pricing of bank loans

Samar S. Alharbi, Md Al Mamun, Nader Atawnah and Sabri Boubaker

The European Journal of Finance, 2025, vol. 31, issue 5, 523-552

Abstract: Our study explores the effect of local gambling preferences (LGP) on bank loan pricing, revealing that lenders impose significantly higher interest rates on firms situated in areas characterized by stronger gambling tendencies. Our results remain robust after conducting a series of sensitivity tests that account for firm-, county-, and loan-specific attributes, as well as several identification robustness checks. Specifically, our relocation analysis shows that firms moving to areas with higher (lower) gambling preferences experience higher (lower) costs of bank loans compared to control groups. Our channel analysis further reveals that local gambling preferences exacerbate a firm's information risk environment, as captured by poorer earnings quality, heightened earnings risk, and greater managerial concealment of bad news, resulting in higher borrowing costs. Finally, we observe that firms in areas with higher LGP encounter more stringent non-price loan terms. However, institutional ownership and the threat of takeovers significantly mitigate the adverse effect of LGP on bank loan pricing.

Date: 2025
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DOI: 10.1080/1351847X.2024.2404088

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