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The loan cost advantage of public firms and financial market conditions: evidence from the European syndicated loan market

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  • Raffaele Gallo

    (Bank of Italy, Directorate General for Economics, Statistics and Research.)

Abstract

This paper analyses the relationship between financial market conditions and the loan cost advantage of being a public firm, verifying whether the borrowing costs for public companies are more sensitive to the financial market climate than those of private firms. The analysis examines the spread of syndicated loans granted to European non-financial firms between 2004 and 2016. The results indicate that a rise in financial instability, proxied by the VSTOXX index, leads to an increase in loan spreads greater for public borrowers than for private ones. The decline in the loan cost benefit of public firms during high volatility periods is due to a weakening in their bargaining power (bargaining power channel) and in the information benefits of being listed on a market (transparency channel). Moreover, a well-developed stock market in the borrower’s home country significantly mitigates the increase in public firms’ borrowing costs observed following a worsening of financial market conditions.

Suggested Citation

  • Raffaele Gallo, 2019. "The loan cost advantage of public firms and financial market conditions: evidence from the European syndicated loan market," Temi di discussione (Economic working papers) 1255, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1255_19
    as

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    1. Raffaele Gallo, 2020. "The impact of the IRB approach on the relationship between the cost of credit for public companies and financial market conditions," Temi di discussione (Economic working papers) 1290, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    financial instability; syndicated loan; public firm; loan spread; financial markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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