The Evolution of Corporate Borrowers: Prime versus LIBOR

Research in Finance

ISBN: 978-0-7623-1345-7, eISBN: 978-1-84950-441-6

ISSN: 0196-3821

Publication date: 11 December 2006


We extend Diamond's (1989, 1991) life-cycle hypothesis to posit that, once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more cheaply at LIBOR as they grow larger, less risky and less characterized by asymmetric information. We conduct multinomial logit regressions to explain firms’ membership in one of three groups: prime only, prime and LIBOR, and LIBOR. We also examine spreads over prime and LIBOR and find that loans set up to allow borrowing at prime carry higher spreads than those allowing borrowing at LIBOR. Both sets of tests support the life-cycle hypothesis.


McGraw, P., Panyagometh, K. and Roberts, G. (2006), "The Evolution of Corporate Borrowers: Prime versus LIBOR", Chen, A. (Ed.) Research in Finance (Research in Finance, Vol. 23), Emerald Group Publishing Limited, Bingley, pp. 221-244.

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