The role of firms’ characteristics on banks’ interest rates

This article investigates the importance of firms’ characteristics in determining loan pricing by banks, both in the cross-section and over time in Portugal. A particular emphasis is placed on three financial aspects of firms: indebtedness, liquidity, and profitability. On average, the interest rate charged on new loans tends to increase with the level of firm indebtedness and decrease as liquidity and profitability rise. For micro and small firms, banks are more reactive to their leverage and less reactive to their measures of liquidity and profitability compared to medium-sized firms. For big firms, banks’ loan pricing does not react to changes in their leverage or liquidity. however changes in their profitability have a stronger impact. Regarding firms’ age, it is observed that throughout a firm’s life cycle, banks’ loan pricing places greater emphasis on the level of debt for younger firms, shifting focus to profitability as firms mature. Additionally, the study demonstrates that the sensitivity of banks’ pricing to firms’ financial conditions changes over time and depends on the macroeconomic and financial environment. During periods of high uncertainty or tight financial conditions, banks tend to be stricter in pricing firm leverage, resulting in higher interest rates compared to more stable periods. Banks become more attentive to firms’ liquidity in times of tight financial conditions. Furthermore, during periods of lower economic growth, banks show increased sensitivity to firm profitability, whereas in environments of high interest rates, this sensitivity is reduced.