-
Views
-
Cite
Cite
Sudheer Chava, Dmitry Livdan, Amiyatosh Purnanandam, Do Shareholder Rights Affect the Cost of Bank Loans?, The Review of Financial Studies, Volume 22, Issue 8, August 2009, Pages 2973–3004, https://doi.org/10.1093/rfs/hhn111
- Share Icon Share
Abstract
Using a large sample of bank loans issued to U.S. firms between 1990 and 2004, we find that lower takeover defenses (as proxied by the lower G-index of Gompers, Ishii, and Metrick 2003) significantly increase the cost of loans for a firm. Firms with lowest takeover defense (democracy) pay a 25% higher spread on their bank loans as compared with firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge a higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans.