The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans
| DOI | https://doi.org/10.1108/CG-02-2021-0071 |
| Published date | 23 November 2021 |
| Date | 23 November 2021 |
| Pages | 846-870 |
| Subject Matter | Strategy,Corporate governance |
| Author | Nuno Moutinho,Carlos Francisco Alves,Francisco Martins |
The effect of borrower country financial
system and corporate governance system
types on the spread of syndicated loans
Nuno Moutinho, Carlos Francisco Alves and Francisco Martins
Abstract
Purpose –This study aims to analyse the effect of borrower’s countries on syndicated loan spreads,
featuring countries according to institutional factors, namely, financial systems and corporate
governancesystems.
Design/methodology/approach –This study is an empiricalinvestigation based on a unique sample of
more than 85,000 syndicated loans from 122 countries. The paper uses standard and two-stage least
squares regression analysis to test whether the types of financial and corporate governance systems
affectloan spreads.
Findings –The paper finds that borrowers from countries with financial systems oriented towards the
banking-based paradigm pay lower interest rate spreads than those from countries with financial
systems orientedtowards the market-based paradigm.In addition, there is evidence that borrowersfrom
countries with more developed financial systems pay lower spreads. The results also show that
borrowers from countries with an Anglo-Saxon governance system pay higherspreads than borrowers
from countrieswith a Continental governance system.
Research limitations/implications –This study does notconsider potential promiscuous relationships
that can arise at the ownershipstructure and governance level between banksand borrowers and may
affectloan spreads.
Practical implications –This study suggests that financial and corporate governance systems are
essential factors in the financial intermediation process. Furthermore, the evidence indicates that
corporates withhigher potential agency costs and higher potentialinformation asymmetry are requested
to pay higher spreads. Therefore, the opportunities to such corporates invest optimally tend to be
scarcer.
Originality/value –The paper highlights the impact of institutional factors on the cost of financing,
characterising the countries according to the type of financial system and the type of corporate
governance system. The study finds that borrowers from countries with bank-based financial systems
pay lowerinterest rate spreads than those from countrieswith market-based financial systems.The paper
also highlightshow the level of financial developmentaffects the cost of financing.The paper focusses on
non-financialfirms, unlike financial firms,which have been the focus of severalempirical studies on topics
relatingto the cost of funding and corporate governance.
Keywords Financial system, Financial development, Corporate governance system,
Institutional theory, Cost of debt, Syndicated bank loans
Paper type Research paper
1. Introduction
Although there is evidence of the influence of the institutional environment of the borrowers’
countries in companies’ capital structure (Rajan and Zingales, 1998;Giannetti, 2003;Alves
and Ferreira, 2011), the literature is less abundant and not conclusive relative to the effects
on financing conditions, namely, loan costs. Carey and Nini (2007) conclude that loans are
cheaper when issued in Europe than in the USA, regardless of borrower or lender
Nuno Moutinho is based at
the Department of Business
and Social Sciences,
Instituto Polite
´cnico de
Braganc¸a, Braganc¸a,
Portugal.
Carlos Francisco Alves is
based at Faculdade de
Economia, CEF.UP,
Universidade do Porto,
Porto, Portugal.
Francisco Martins is based
at Faculdade de Economia,
Universidade do Porto,
Porto, Portugal.
Received 11 February 2021
Revised 17 June 2021
11 September 2021
20 October 2021
Accepted 2 November 2021
CEF.UP: This research has
been financed by Portuguese
public funds through FCT –
Fundac¸a
˜o para a Cie
ˆncia e a
Tecnologia, I.P., in the
framework of the project with
references UIDB/04105/2020.
PAGE 846 jCORPORATE GOVERNANCE jVOL. 22 NO. 4 2022, pp. 846-870, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-02-2021-0071
nationality. Houston et al. (2012) equally verify that loan spreads depend on borrower
nationality and those syndicated loans granted to European companies are cheaper than
those granted to North American companies. Both studies evidence that companies prefer
banks in their domestic market, which (eventually due to lower information asymmetry) is
reflected in lower spreads. Also, Giannetti and Laeven (2012) state that domestic banks
have informational advantages on companies from their country of origin. The proximity
allows them to know better the factors that affect borrowers, understand the political and
economic risks and have greater familiarity with the borrower due to physical and cultural
proximity.
This research provides evidence towards the assumption that borrower country’s
characteristics may be relevant in determining the cost of syndicated bank financing. The
purpose of this study is to analyse if, ceteris paribus, the characteristics of the borrower’s
country influence the syndicated loan’s spread. In particular, we analyse the influence of
two distinctive characteristics, namely, the type of financial system and the type of
corporate governance system. In addition, the effect of the level of financial development is
also investigated.
The financial systems differ from country to country. However, the countries can be
classified according to their proximity to two paradigms, namely, the bank-based financial
system and the market-based financial system. In countries with a bank-based financial
system, companies have closer relationships with financing institutions, and therefore,
information asymmetry tends to be lower. Conversely, in countries with market-based
financial systems, lenders and borrowers tend to have fewer close ties and their
relationships are based more on normal market conditions and arrangements. Therefore, it
is expected, ceteris paribus, that borrowers from countries with different types of financial
systems pay different interest rate spreads. There are several reasons for that. The first is
informational. Effectively, in countries with bank-based financial systems, financial
institutions have access to private information on the borrowers and can adequately monitor
the company, which promotes a more efficient capital allocation (Levine, 2002).
Accordingly, it is expected that financing costsare lower in countries with such bank-based
financial systems. However, it is also possible that, in such countries, banks use close
relationships and informational advantage to charge high-interest rates later (Rajan, 1992;
Weinstein and Yafeh, 1998;Boot, 2000). Moreover, relationship bankingis likely to produce
a differentiating factor, which can lead to higher spreads (Marques and Alves, 2021).
Therefore, the impact of the type of financial system on funding costs deserves to be
investigated.
The corporate governance systems also differ around the world. The paradigmatic systems
are two, namely, Anglo-Saxon and Continental. The Anglo-Saxon system is characterised
by market orientation, disperse ownership, the existence of institutional investors and a
large, liquid and deep capital market. The governance model is one tier and variable
remuneration plays an important role as an incentive mechanism. On the contrary, bank
financing, concentrated ownership and thin capital markets typified the continental
governance system. The companies have typically two-tier models, and variable
remuneration is less prominent as an incentive mechanism. The management and
governance in the Anglo-Saxon system rest with the board of directors, while in the
continental system, the governance mainly rests with the supervisory board and the
management rests primarily with the executive board. Bank financing is very important in a
continental governance system and much less relevant in an Anglo-Saxon governance
system (Cuervo, 2002;Cernat, 2004). In the Anglo-Saxon paradigm, the banks are more
distant from companies and their governance.
On the contrary, in the Continental paradigm, banks more closelymonitor the company’s life
and its governance. In these countries, the institutional framework favours long-term
relationships between banks and firms. Several institutions contribute to this effect, such as
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