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Do Shareholder Rights Affect the Cost of Bank Loans?

Sudheer Chava, Dmitry Livdan and Amiyatosh Purnanandam
The Review of Financial Studies
Vol. 22, No. 8 (Aug., 2009), pp. 2973-3004
Stable URL: http://www.jstor.org/stable/40247653
Page Count: 32
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Do Shareholder Rights Affect the Cost of Bank Loans?
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Abstract

Using a large sample of bank loans issued to U. S. firms between 1990 and 2004, we find that lower takeover defenses (as proxied by the lower G-index of Gompers, Ishii, and Metrick 2003) significantly increase the cost of loans for a firm. Firms with lowest takeover defense (democracy) pay a 25% higher spread on their bank loans as compared with firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge a higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans.

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