Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • October 2020
  • Article
  • Journal of Corporate Finance

Corporate Legal Structure and Bank Loan Spread

By: Anywhere (Siko) Sikochi
  • Format:Print
ShareBar

Abstract

This study examines how a corporate legal structure may affect borrowing costs. Corporate legal structure refers to the legal fragmentation of a firm into multiple, separately incorporated entities. This fragmentation is bound to be a factor when lenders determine the pricing of debt and design of contract terms because they can enter into legally enforceable agreements only with specific legal entities. Using a sample of bank loans issued to U.S. parent companies, I find that a more complex corporate legal structure is associated with higher loan spreads. The findings are robust to several firm and loan characteristics, and are incremental to the effects of other forms of organizational structure, namely business and geographic diversification. I also subject the results to tests to correct for potential endogeneity concerns. I also find that the level of debt at subsidiaries affects the parent company's borrowing costs. However, the subsidiary debt does not moderate the relationship between legal structure and borrowing costs. Evidence suggests that this is, at least partly, explained by recovery costs. There is also some evidence that a corporate legal structure affects the design of the debt contracts.

Keywords

Corporate Legal Structure; Subsidiaries; Bank Loans; Minority Interest; Credit Risk; Organizational Structure; Business Subsidiaries; Financing and Loans

Citation

Sikochi, Anywhere (Siko). "Corporate Legal Structure and Bank Loan Spread." Journal of Corporate Finance 64 (October 2020).
  • Read Now

More from the Author

    • December 2024
    • Faculty Research

    Launch Africa Ventures

    By: Anywhere Sikochi, Adam Sulkowski and Francesco Tronci
    • 2024
    • Faculty Research

    Public Sector SME Grading System in Emerging Markets: A Focus on Nigeria

    By: Saveshen Pillay, Anywhere Sikochi, Charles Odii, Zaakirah Ismail, Regina Bamaiyi and Denise Mubaiwa
    • Fall 2024
    • Journal of Financial Reporting

    The Credit Rating Agency Market in Africa: Landscape and Future Research Directions

    By: Saveshen Pillay and Anywhere Sikochi
More from the Author
  • Launch Africa Ventures By: Anywhere Sikochi, Adam Sulkowski and Francesco Tronci
  • Public Sector SME Grading System in Emerging Markets: A Focus on Nigeria By: Saveshen Pillay, Anywhere Sikochi, Charles Odii, Zaakirah Ismail, Regina Bamaiyi and Denise Mubaiwa
  • The Credit Rating Agency Market in Africa: Landscape and Future Research Directions By: Saveshen Pillay and Anywhere Sikochi
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College.