1. Property Rights Protection and Bank Loan Pricing Kee-Hong Bae Korea University Vidhan K. Goyal Hong Kong University of Science and Technology

2. Background More secure property rights result in: –Higher stock valuations –Greater use of external financing –More investments from external funds Variation in property rights protection affects the cost of external financing.

3. Importance of bank loans in the mix of financing

4. Property Rights and Bank Loan Contracts Loan recontracting: Banks typically respond to declining credit quality by recontracting loans: –They may raise interest rates, demand more collateral, shorten loan maturity, and restrict future activities. Weak property rights make it difficult for lenders to recontract. Banks also face higher risk of contract repudiation.

5. Research Question In weak property rights environments, banks will require higher loan spreads to compensate for greater contracting risk. –Do cross-country differences in the protection of property rights matter for default spreads on bank loans? Country-level analysis Loan spread-property rights relation by loan maturity Firm-level analysis: controls for borrower risk characteristics.

6. Sample Data on bank loans is from Dealscan. –Includes most loans to large publicly traded companies in countries around the world The sample includes bank loans to corporations denominated in US dollars Loan spreads are spreads over LIBOR The sample covers 36 countries during the 1994-1999 period.

7. Borrowers International banks lend to firms that are: –Among the largest in their respective countries Mean and median assets are twice as large as a typical Worldscope firm –More profitable

8. Measuring Property Rights Index Property Rights Index (LLSV, 1998) –Sum of: Corruption Risk of expropriation of private property Risk that contracts may be repudiated

9. Property Rights and Loan Spreads

10. Loan Contracts and Property Rights

11. Correlations

12. Tests Cross-country regressions –Robustness checks Cross-country regressions by loan maturity Firm level analysis

13. Baseline Regression Results Dependent variable: Log of the country median loan spread

14. Predicted Loan Spreads and Property Rights Protection

15. Controlling for Legal Origin Dummies

16. Robustness – Country Risk and Banking Sector Structure

17. Robustness – Size and Activity of Debt and Equity Markets

18. Spreads-Property Rights Sensitivity by Loan Maturity

19. Firm-level Analysis Control for borrower characteristics Firm size Leverage Profitability Capital expenditure to assets ratio Market-to-book assets ratio Intangible to total asset ratio Non-price loan terms Match borrowers to firms on Worldscope 5,100 loans during 1994-1999 spanning 25 countries

20. Firm-level Analysis with Country Fixed Effects

21. Country Fixed Effects and Property Rights

22. Conclusions Differences in property rights protection translate into large differences in loan pricing. We controlled for: –Macro and institutional factors –Borrower risk characteristics Property rights negatively affect loan spreads for both short and long term loans