Prestige and loan pricing
- We find that prestigious companies pay lower spreads and upfront fees on their loans despite the fact that prestige does not predict default risk over the life of the loan. Using survey data on firm-level prestige, we show that a one standard deviation increase in prestige reduces loan spreads by 6.18% per year and upfront fees by 22.86%. We identify causal effects (i) using fraud by industry peers as an instrument for borrower prestige and (ii) exploiting a regression discontinuity around rank 100 of the prestige survey. Banks that lend to prestigious firms attract more business afterwards compared to otherwise similar institutions. Moreover, the effect of prestige on upfront fees is particularly strong for new bank relationships. Our findings suggest that prestigious firms receive cheaper funding because the associated lending relationship helps banks establish valuable credentials they use to compete for future borrowers.
| Author: | Alexander Muermann, Thomas Rauter |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-416830 |
| URL: | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2850570 |
| Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 544 |
| Series (Serial Number): | CFS working paper series (544) |
| Publisher: | Center for Financial Studies |
| Place of publication: | Frankfurt, M. |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2016 |
| Year of first Publication: | 2016 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2016/10/18 |
| Tag: | Bank Incentives; Firm Prestige; Loan Pricing |
| Issue: | January 28, 2016 |
| Page Number: | 52 |
| Note: | First Version: October 19, 2015 This Version: January 28, 2016 |
| HeBIS-PPN: | 390270962 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
