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Product market relationships and cost of bank loans: Evidence from strategic alliances

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  • Fang, Yiwei
  • Francis, Bill
  • Hasan, Iftekhar
  • Wang, Haizhi

Abstract

This paper examines the relation between strategic alliances and non-financial firms’ bank loan financing. We construct several measures to capture firms’ alliance activities. The key finding is that borrowing firms with active alliance involvement experience lower cost of bank loans. The reduction of borrowing cost is strongest for financially unconstrained firms and firms with high G-index and intensive monitoring from institutional investors. We also relate various characteristics of alliance agreements to the cost of bank borrowing, and find evidence supporting market power hypothesis and organizational flexibility hypothesis. We further report that allying with a prestigious partner (i.e., S&P 1500 firms) provides certification effect that lowers bank loan cost. In addition, firms positioned in the center of the alliance network enjoy lower cost of bank loans. Lastly, we document that firms engaging in alliance activities expand their debt capacity and are less likely to use collaterals and covenants in their bank loan contracts.

Suggested Citation

  • Fang, Yiwei & Francis, Bill & Hasan, Iftekhar & Wang, Haizhi, 2012. "Product market relationships and cost of bank loans: Evidence from strategic alliances," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 653-674.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:5:p:653-674
    DOI: 10.1016/j.jempfin.2012.06.002
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    More about this item

    Keywords

    Cost of bank loans; Strategic alliances; Product market relationships;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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