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Publications
  • October 2020
  • Article
  • Journal of Corporate Finance

Corporate Legal Structure and Bank Loan Spread

By: Anywhere (Siko) Sikochi
  • Format:Print
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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).
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About The Author

Anywhere Sikochi

Accounting and Management
→More Publications

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More from the Author
  • The Credit Rating Agency Market in Africa By: Saveshen Pillay and Anywhere Sikochi
  • Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings By: Dane Christensen, George Serafeim and Anywhere Sikochi
  • Transitory and Permanent Cash Flow Shocks in Debt Contract Design By: Le Ma, Anywhere Sikochi and Yajun Xiao
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