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1 – 10 of over 13000Russell D. Kashian and Ran Tao
The purpose of this paper is to examine loan commitments and lending patterns of community banks. The authors also test for shifts in these relationships in the period unwinding…
Abstract
Purpose
The purpose of this paper is to examine loan commitments and lending patterns of community banks. The authors also test for shifts in these relationships in the period unwinding the subprime crisis.
Design/methodology/approach
Standard panel fixed-effect models as well as hierarchical (mixed) regression models are estimated given that banks operating in a specific geographic market may vary systematically with differences in firm-level characteristics. Hierarchical (mixed) regression models can control for within-counties and within-banks similarities. The authors also employ pooled estimations with clustered standard errors at the bank level as robustness check.
Findings
The empirical results show that the use of loan commitments is generally associated with moderate increase in profitability and higher insolvency risk. However, during the recent financial crisis, the use of loan commitments becomes safer. The use of loan commitments is more risky for community banks that concentrate more on loans that focus on real estate, while it is safer for community banks with higher equity. In regards to the performance of community banks’ balance sheet loan activities, a more concentrated loan portfolio results in lower return and higher insolvency risks. High loan growth generates higher return and higher risks.
Originality/value
Prior to the 2008 credit meltdown, community banks significantly increased their issuance of off-balance sheet loan commitments. While the ratio of loan commitments to total loans has come down in recent years it continues to exceed the levels reached in the 1990s. This evolution has, however resulted in little research regarding its implications on community bank profitability and risk.
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This study aims to provide a fresh look at banks as lenders in and extending past the COVID-19 crisis, with a particular focus on examining the results of recent work by Lei et al.…
Abstract
Purpose
This study aims to provide a fresh look at banks as lenders in and extending past the COVID-19 crisis, with a particular focus on examining the results of recent work by Lei et al. (2020).
Design/methodology/approach
The authors’ replication, as well as the original paper, uses a fixed-effects model on panel data. The authors discuss issues regarding data sources as well as use an array of panel data robustness checks to help ascertain an appropriate empirical specification for continued research of this type.
Findings
The authors show that the results of Lei et al. (2020) are sensitive to the data source, as well as the construction of the standard errors in their regression framework, with an appropriate specification uncovered through panel data statistical tests. The authors also provide some extensions to the original work by including interacted fixed-effects models and extending the sample period from 2020Q1 to 2021Q1, noting some changes in results.
Originality/value
The authors provide novel results on banks’ lending constraints both at the onset of the COVID-19 pandemic and shortly thereafter. The study also provides an empirical framework for future studies conducted on similar panel data sets.
This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans.
Abstract
Purpose
This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans.
Design/methodology/approach
The study uses a sample of 1,173 US-listed firms that issued syndicated loans both before and after their compliance with SOX 404 to analyze the changes in loan spread’s sensitivity to some key accounting metrics such as ROA, interest coverage, leverage and net worth.
Findings
The study finds that the interest spread’s sensitivity to key accounting metrics, most noticeably for ROA, declined following the borrower’s compliance with the requirements of SOX 404. The decline was not explainable by borrowers that disclosed internal control weaknesses but concentrated among borrowers suspected of real earnings management (REM).
Originality/value
By examining the effects of SOX 404 on banks’ pricing process, this study augments the literature on SOX’s economic consequences. The findings suggest that lenders perceive little new information from SOX 404 disclosures of internal control deficiencies and are cautious about the accounting information provided by REM borrowers. It also extends the research on the use of accounting information in debt contracting. By examining loan interest’s sensitivity to accounting metrics, it broadens the concept of debt contracting value of accounting information to include accounting’s usefulness for assessing credit risk at loan inception.
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Roza Hazli Zakaria and Abdul Ghafar Ismail
The purpose of this paper is to validate the concern that banks' increasing involvement in securitization activity restrains banks' lending, as well as their degree of risk…
Abstract
Purpose
The purpose of this paper is to validate the concern that banks' increasing involvement in securitization activity restrains banks' lending, as well as their degree of risk tolerance. Theoretical frameworks claim that securitization reduces risk, hence decreasing banks' degree of risk aversion. Subsequently, banks would be motivated to increase their percentage of assets devoted to risky activities, which is lending to economic sectors. However, banking statistics dictates that banks' lending is on the decline while banks' securitization activities are on the rise.
Design/methodology/approach
The paper refers specifically to the Malaysian Islamic commercial banks and utilizes standard panel data analysis.
Findings
Supportive evidence was found that banks' involvement in securitization activity do restrain their lending activity. In addition, banks tend to have a riskier portfolio composition following their involvement in securitization activity. Taken together, this signals that banks' involvement in securitization activity needs to be regulated or restricted since excessive securitization activities could curtail credit and increase risk inherent in banks' lending portfolio.
Originality/value
This study departs from previous literature in the sense that an alternative method is introduced to measure banks' securitization activity.
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Marc Cowling, Weixi Liu and Ning Zhang
The purpose of this paper is to investigate how entrepreneurs demand for external finance changed as the economy continued to be mired in its third and fourth years of the global…
Abstract
Purpose
The purpose of this paper is to investigate how entrepreneurs demand for external finance changed as the economy continued to be mired in its third and fourth years of the global financial crisis (GFC) and whether or not external finance has become more difficult to access as the recession progressed.
Design/methodology/approach
Using a large-scale survey data on over 30,000 UK small- and medium-sized enterprises between July 2011 and March 2013, the authors estimate a series of conditional probit models to empirically test the determinants of the supply of, and demand for external finance.
Findings
Older firms and those with a higher risk rating, and a record of financial delinquency, were more likely to have a demand for external finance. The opposite was true for women-led businesses and firms with positive profits. In general finance was more readily available to older firms post-GFC, but banks were very unwilling to advance money to firms with a high-risk rating or a record of any financial delinquency. It is estimated that a maximum of 42,000 smaller firms were denied credit, which was significantly lower than the peak of 119,000 during the financial crisis.
Originality/value
This paper provides timely evidence that adds to the general understanding of what really happens in the market for small business financing three to five years into an economic downturn and in the early post-GFC period, from both a demand and supply perspective. This will enable the authors to consider what the potential impacts of credit rationing on the small business sector are and also identify areas where government action might be appropriate.
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Yane Chandera and Lukas Setia-Atmaja
This study examines the impact of firm-bank relationships on bank loan spreads and the mitigating role of firm credit ratings on that impact.
Abstract
Purpose
This study examines the impact of firm-bank relationships on bank loan spreads and the mitigating role of firm credit ratings on that impact.
Design/methodology/approach
The study sample consists of Indonesian publicly listed companies for the period 2006 to 2016; bank-loan data was extracted from the Loan Pricing Corporation Dealscan database. For the degree of firm-bank relationships, the data on each loan is manually computed, using five different methods taken from Bharath et al. (2011) and Fields et al. (2012). All of the regression analyses are controlled for the year fixed effects, heteroscedasticity, and firm-level clustering. To address the endogeneity issues, this study uses several methods, including partitioning the sample, running nearest-neighbour and propensity score matching tests, and using instrumental variables in two-staged least-squares regression models.
Findings
In line with relationship theory and in opposition to the hold-up argument, this study finds that lending relationships reduce bank loan spreads and that the impact is more noticeable among non-rated Indonesian firms. Specifically, each additional unit in the total number of years of a firm-bank relationship and the number of previous loan contracts with the same bank are associated with 7.34 and 9.15 basis-point decreases, respectively, in these loan spreads.
Practical implications
Corporations and banks should maintain close, long-term relationships to reduce the screening and monitoring costs of borrowing. Regulators should create public policies that encourage banks to put more emphasis on relationships in their lending practices, especially in relation to crisis-prone companies.
Originality/value
To the best of the authors’ knowledge, this is the first study to examine the impact of lending relationships on bank loan spreads in Indonesia. The study offers insights on banking relationships in emerging markets with concentrated banking industries, underdeveloped capital markets and prominent business-group affiliations.
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This study explores how the firm’s proprietary information has an impact on the bank loan contracts. It explains the propensity of using the competitive bid option (CBO) in the…
Abstract
Purpose
This study explores how the firm’s proprietary information has an impact on the bank loan contracts. It explains the propensity of using the competitive bid option (CBO) in the syndicate loans to solicit the best bid for innovative firms and how it changes based on industry competition and the degree of innovations. This research also examines how the interstate banking deregulation (Interstate Banking and Branching Efficiency Act) in 1994 affected the private loan contracts for innovative borrowers.
Design/methodology/approach
The study uses various econometric analyses. First, it uses the propensity score matching analysis to see the impact of patents on pricing terms. Second, it uses the two-stage least square (2SLS) analysis by implementing the litigation and non-NYSE variables. Finally, it studies the impact of the policy change of the Interstate Banking and Branching Efficiency Act of 1994 on the bank loan contracts.
Findings
Firms with more proprietary information pays more annual facility fees but less other fees. The patents are the primary determinants of the usage of CBO in the syndicate loans to solicit the best bid. While innovative firms can have better contract conditions by the CBO, firms with more proprietary information will less likely to use the CBO option to minimize the leakage of private information and the severe monitoring from the banks. Finally, more proprietary information lowered the loan spread for firms dependent on the external capital after the interstate banking deregulation.
Originality/value
The findings of this research will help senior executives with responsibility for financing their innovative projects. In addition, these findings should prove helpful for the lawmakers to boost economies.
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The operations and viability of microfinance institutions (MFIs), crucial for socioeconomic development and poverty reduction, heavily rely on the multilevel relationships among…
Abstract
Purpose
The operations and viability of microfinance institutions (MFIs), crucial for socioeconomic development and poverty reduction, heavily rely on the multilevel relationships among borrowers, loan officers and MFIs. This study examines the relationship between interpersonal and firm-level relationship quality (RQ) and their simultaneous impact on customer loyalty (CL) in microfinance. Additionally, it investigates the mediating effect of firm-level RQ between CL and interpersonal RQ.
Design/methodology/approach
In this study, correlational research methods were employed. Completed questionnaires were received from 498 MFI borrowers in Dar es Salaam and Mwanza cities. Regression techniques and structural equation modeling were utilized to analyze the data. Before hypothesis testing, the validity and reliability of the measurements were confirmed.
Findings
Interpersonal-level and firm-level RQs are significantly related. Interpersonal-level RQ and its dimensions are significantly linked to CL, whereas firm-level RQ and its dimensions are insignificantly related to CL, except for commitment. Interpersonal-level relationships have a stronger impact on CL than firm-level relationships. Among all the dimensions of RQ, commitment has the greatest influence on CL at both levels. Firm-level RQ negatively and insignificantly mediates the relation between interpersonal-level RQ and CL.
Research limitations/implications
The study findings only apply to Tanzania's microfinance industry, because the interactions between and the relative effects of firm and interpersonal ties may vary across various contexts and cultures. Future research may consider replicating this study in other contexts and cultures to confirm these findings.
Practical implications
This study advances the understanding of how multilevel relationships affect CL within the microfinance industry. This insight will assist MFIs and policymakers in identifying alternative and more efficient relational strategies to enhance CL, a critical element for the sustainability of MFIs. In turn, the sustainability of MFIs in low-income countries like Tanzania holds paramount importance for stimulating socioeconomic development and, hence, achieving the goal of poverty eradication.
Originality/value
While previous studies on multilevel relationships concentrated on a single relational dimension (trust) and were conducted within the realms of retail, airline and industrial manufacturing, the current study employs the three most popular relational dimensions: trust, commitment and satisfaction, within the microfinance context. Additionally, this study investigates the mediation effect of firm-level RQ between interpersonal-level RQ and CL, a previously unexplored area in research.
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