Formal and informal institutions, banking system and ownership structureinfluence on corporate debt conditions

Resumen

Debt is the main source of external financing for firms around the world and bank loans are the most common external source. Financial literature has highlighted the importance of the legal and institutional quality when firms take decisions about capital structure, and the role of large shareholders in the governance of non-financial firms has been one of the most interesting and controversial issues analysed in the literature on corporate governance. Given the importance of debt in firm financing, this thesis aims to contribute to such analysis of the determinants of debt conditions. Firstly, we focus on formal and informal institutions studying how institutions and the banking system structure influence the cost of corporate debt (chapter 1) and how informal institutions affect the bank loan spread (chapter 2). Secondly, we focus on ownership structure and study the influence of large bank shareholders on bank loan cost and maturity during the Global Financial Crisis (chapter 3) and the impact of large shareholders on the terms of bank loans for nonfinancial Spanish public and private firms (chapter 4). In the first study, we analyse the effect of institutions and the structure of the banking system on the cost of debt for a sample of 19,785 firms from 37 countries during the period 2003-2012. We explore the effect of the institutional quality through variables such as the legal enforcement, the protection of creditor rights and the depth of credit information; and the effect of the banking structure system through the weight of banks in the economy and bank concentration. Our results show that the cost of debt decreases with the rule of law, the protection of creditor’s rights and the weight of banks in the economy. Bank financing and bank concentration have a positive differential effect on the cost of debt in those countries where the financial difficulties of banks are greater. Moreover, legal enforcement, the protection of creditors’ rights and the weight of bank financing have a greater influence in countries with a lower degree of economic development. In the second analysis, we focus on the effect of trust on bank loan spreads for a sample of 16,324 loans from 36 countries over the period 2003-2013, considering not just the role of trust, but also how its effect is moderated by country’s legal protection of property rights and economic development. The results show that greater trust tends to reduce bank loan spreads when the degree of protection of property rights is weak, in line with trust and legal protection being alternative mechanism for reducing the cost of debt. As regards the degree of economic development, the results show that both trust and legal protection have a greater influence on the interest rate spread of bank loans in countries with a lower degree of economic development. In the third chapter, we analyse the influence of large bank shareholders on the terms of bank loans for a sample of 12,045 loans to 3,290 borrowers from 45 countries over the period 2004-2013. We investigate the effects of bank control over bank loan terms during the crisis, regardless of whether the bank shareholder is a lender or not. In line with a monitoring effect, the results suggest that firms with bank shareholders that are non-lenders borrowed at lower interest rates during the period of crisis. However, borrowers paid higher spreads when they borrowed from banks that are also shareholders. This effect is consistent with banks obtaining private benefits as large shareholders as a consequence of the informational hold-up problems affecting borrowers. Finally, in the last chapter we study the impact of large shareholders on the terms of bank loans for a sample of 984 loans to 261 nonfinancial Spanish public and private firms over the period 2001-2007. The results show that the presence of large controlling shareholders increases interest rate spread and reduces loan maturity. A less evenly balanced distribution of ownership among large controlling shareholders and other large shareholders is associated with higher loan spreads. During the crisis, loan spread increased and maturity decreased, reflecting that non-financial Spanish firms obtained worse conditions on bank loans during that period. Moreover, the presence of families as large controlling shareholders was found to be associated with longer maturities during the financial crisis, revealing that these shareholders reduced the agency costs of debt.