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6. Conclusion
Recently, a number of well-known corporations had been prosecuted as a result of violating US domestic regulations or International Standards. Among the research related to the effect in the level of prosecution and corporate misconduct, most existing literatures focus on the release of news (including the news of being prosecuted or the involvement of lawsuits) of company and how it may influence the firm’s market value in terms of equity market. So far we know little about how the events of being convicted affect specific contract terms such as loan spread in syndicated loan market. This paper attempts to fill this gap by analyzing the impact of corporate convictions on the price of bank debt.
In this thesis, we examine corporate misconduct from the debt holder’s perspective by investigating how the price of bank debt changes as a result of corporate conviction.
Using conviction year as the turning point to distinguish ex ante and ex post facilities, we find that there's no significant differences on the price of loan between facilities initiated before and those initiated after the conviction. Even as we take some of the conviction terms and characteristics into account, we find that among all the interaction terms concerning corporate conviction only the coefficient of PC*CrimeSeverity is significant and positive, meaning that compared to firms committing minor violations, firms committing severe violations tend to face higher cost of debt after corporate conviction.
Taking the potential lag between media coverage and the time recognized in conviction database into consideration, we further apply a sketchy adjustment on the turning point of time, recognizing the year before conviction as the year when media coverage of the conviction on the corporate misconduct first show up. Under this structure, we find significant evidence that the effect of corporate conviction is
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positively associated with the spread of firm’s bank debt. This means that if our application of time adjustment does justice for the time lag for initial release, then the increase in the cost of debt caused by corporate misconduct is an ex post cost borne by the criminal firm. Moreover, when concerning interaction terms with conviction effect, we find that firms that are fined or convicted of fraud-related crimes tend to face higher loan spread than those aren’t after conviction; while at the same time, foreign-based convicted firms tend to face lower spread than those domestic-based after conviction.
To sum up, this paper makes two contributions. First, it contributes to the loan contracting literature by examining the relationship between loan spread and corporate conviction. Second, this paper is the first to link data of Loan Pricing Corporation’s Dealscan and the database of Corporate Convictions. Through the collaboration of these two distinctive yet potentially relevant database, we expect this paper to be the spark for many studies of related issues to come.
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(5-year observation window) Summary Statistics (Full Sample)
This table presents the summary statistics results of loan contract terms for convicted corporations both before and after corporate convictions (sample firms). Number of observations (N), mean, and standard deviation (STD) of debt contract terms are reported for loans in the full sample. The starting year of facilities in our sample ranges from 1998 to 2010.
Table 2 presents summary statistics of loan contract terms for sample firms. Number of observations (N), mean, and standard deviation (STD) of debt contract terms are reported for loans initiated before corporate conviction and loans initiated after corporate conviction. The means of the differences between the variables before conviction and after conviction are also reported. Significance at the 10%, 5% and 1% level is indicated by *, **, ***, respectively.
Performance Pricing(dummy) 508 0.49 0.50 Performance Pricing(dummy) 441 0.37 0.48 -0.12***
Number of Security 508 0.69 1.53 Number of Security 441 0.66 0.88 -0.03 Number of Lenders 438 16.11 12.12 Number of Lenders 424 9.87 9.12 -6.24***
Lead Bank Share 501 22.28 27.17 Lead Bank Share 438 25.06 26.65 2.77
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(5-year observation window)
Regression of Spread on Conviction, Firm Characteristics and Features of Loans
Table 3 presents the result of regression where loan spread is the dependent variable. To capture the effect of corporate conviction, we define a dummy variable, post-conviction, which is equal to one if the loan is activated after corporate conviction and zero otherwise. The details of definitions and measurements of all the other variables are reported in Appendix B. Significance at the 10%, 5% and 1% level is indicated by *,**, ***, respectively.
(1) (2) (3)
Post-Conviction -34.24** -13.87 -11.11
(-2.78) (-1.36) (-1.14)
Performance Pricing -51.66***
(-7.31)
Year Fixed Effect yes yes yes
Industry Fixed Effect yes yes yes
N 949 920 920
Adjusted R Square 0.5891 0.7317 0.7554
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Regression of Spread on Characteristics of Convictions, Firms and Loans
Table 4 presents the result of regression where loan spread is the dependent variable. The dummy variable, post-conviction, is equal to one if the loan is activated after corporate conviction and zero otherwise. The detailed definitions of other variables are reported in Appendix B. Significance at the 10%, 5% and 1% level is indicated by *, **, ***, respectively.
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(adjusted 5-year observation window（based on 1 year backward）)
Based on an alternative definition of observation window where we shift 1 year backward for each agreement year as the representative of conviction announcement year, Table 5 presents the summary statistics results of loan contract terms for new sample of convicted corporations both before and after corporate convictions (sample firms). Number of observations (N), mean, and standard deviation (STD) of debt contract terms are reported for loans in the full sample under alternative 5-year
Summary Statistics (Pre/Post- conviction news Loans) (adjusted 5-year observation window（based on 1 year backward）)
Table 6 presents summary statistics of loan contract terms for sample firms. Number of observations (N), mean, and standard deviation (STD) of debt contract terms are reported for loans initiated before corporate conviction and loans initiated after corporate conviction. The means of the differences between the variables before conviction and after conviction are also reported. Significance at the 10%, 5% and 1%
level is indicated by *, **, ***, respectively.
Pre-proxy year for release of conviction news Post- proxy year for release of conviction news Difference
N Mean Std Dev N Mean Std Dev Mean
Loan Spread(basis point) 728 150.405 125.013 Loan Spread(basis point) 445 223.621 181.679 73.22***
Loan Maturity(months) 728 41.139 25.394 Loan Maturity(months) 445 45.969 21.612 4.83***
Loan Size(millions) 728 675 951 Loan Size(millions) 445 737 1164 62 number of covenants 728 1.522 1.545 number of covenants 445 2.004 1.602 0.48***
Performance Pricing(dummy) 728 0.496 0.500 Performance Pricing (dummy) 445 0.382 0.486 -0.11***
Number of Security 728 0.570 1.348 Number of Security 445 0.609 0.872 0.04 Number of Lenders 638 15.400 11.527 Number of Lenders 426 10.603 9.334 -4.8***
Lead Bank Share 712 21.587 25.948 Lead Bank Share 439 23.468 26.168 1.88
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(adjusted 5-year observation window（based on 1 year backward）)
Regression of Spread on Conviction, Firm Characteristics and Features of Loans
Table 7 presents the result of regression where loan spread is the dependent variable. To capture the effect of corporate conviction, we define a dummy variable,Post-ConvictionNews, which is equal to one if the loan is activated after corporate conviction
and zero otherwise. The details of definitions and measurements of all the other variables are reported in Appendix B. Significance at the 10%, 5% and 1% level is indicated by *,**, ***, respectively.
(1) (2) (3)
Post-ConvictionNews 13.09 26.98*** 24.05**
(1.33) (3.49) (3.22)
Performance Pricing -38.4***
(-6.8)
Year Fixed Effect yes yes yes
Industry Fixed Effect yes yes yes
N 1173 1136 1136
Adjusted R Square 0.4723 0.6975 0.7208
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Table 8 (adjusted 5-year observation window（based on 1 year backward）)
Regression of Spread on Post-Conviction, Firm Characteristics and Features of Loans
Table 8 presents the result of regression where loan spread is the dependent variable. The dummy variable Post-ConvictionNews is equal to one if the loan is activated after the release of corporate conviction news and zero otherwise. The detailed definitions of other variables are reported inAppendix B. Significance at the 10%, 5% and 1% level is indicated by *, **, ***, respectively.
(1) (2) (3) (4) (5)
Post-ConvictionNews 9.16 23.75** 25.43*** 25.71** 13.49
(0.86) (3.11) (3.41) (2.62) (1.55)
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(Using the actual release year of related news as the turning point)
Regression of Spread on Conviction, Firm Characteristics and Features of Loans
Table 9 presents the result of regression where loan spread is the dependent variable. To capture the effect of corporate conviction, we define a dummy variable,Post-ConvictionNews, which is equal to one if the loan is activated after corporate conviction
and zero otherwise. The details of definitions and measurements of all the other variables are reported in Appendix B. Significance at the 10%, 5% and 1% level is indicated by *,**, ***, respectively.
Leverage Ratio 79.58*** 60.60**
(4.01) (3.07)
Profitability -125.1* -150.5*
(-2.04) (-2.57)
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(Using the actual release year of related news as the turning point)
Regression of Spread on Post-Conviction, Firm Characteristics and Features of Loans
Table 10 presents the result of regression where loan spread is the dependent variable. The dummy variable Post-ConvictionNews is equal to one if the loan is activated after the release of related corporate conviction news and zero otherwise. The detailed definitions of other variables are reported in Appendix B. Significance at the 10%, 5% and 1% level is indicated by *, **, ***, respectively.
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Loan Type and Primary Purpose
0.19%
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Loan Spread Loan spread is measured as all-in spread drawn in the Dealscan database. All-in spread drawn is defined as the amount the borrower pays in basis points over LIBOR for each dollar drawn down. This measure adds the borrowing spread of the loan over LIBOR with any annual fee paid to the bank group.
Independent Variable
Post-Conviction A dummy variable that equals to one if the loan facility is initiated after corporate conviction, and zero otherwise
Post-Conviction News A dummy variable that equals to one if the loan facility is initiated after the release of corporate conviction news, and zero otherwise
Firm Characteristics
Ln(Asset) Natural logarithm of borrowing corporation’s total asset Market-to-Book Ratio Market Capitalization/Total Equity
Leverage Ratio Total Long-Term Debt/Total Asset Profitability EBITDA/Total Asset
Loan Characteristics
Loan Maturity Maturity of loan contract in months
Ln(Loan Size) Natural logarithm of the loan facility amount. Loan amount is measured in millions of dollars
Performance Pricing A dummy variable that equals one if the loan facility uses performance pricing
Interaction Terms
PC*Fined The interaction term of post-conviction and the dummy variable
Fined which indicates whether the convicted firm is sanctioned
with fines. If the convicted firm is fined, then Fined is equal to one, and zero otherwise.PC*withCompliance The interaction term of post-conviction and the dummy variable
withCompliance which indicates whether the convicted firm is
under compliance program at the time of conviction. If compliance program is obtained, then withCompliance is equal to one, and zero otherwise.PC*FCC The interaction term of post-conviction and the dummy variable
FCC which indicates whether the convicted firm is incorporated
in US or not. If the convicted firm is incorporated in US, then FCC is equal to one, and zero otherwise.‧ 國
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PC*CrimeSeverity The interaction term of post-conviction and the dummy variable
CrimeSeverity which indicates whether the convicted firm is
accused of violating generally well-known standard or commits relatively serious crime. If the convicted firm is convicted of Type 1 severity of crime then CrimeSeverity is equal to one, and zero otherwise. The classification of Crime Severity in this paper is shown in Appendix C.PC*FRC The interaction term of post-conviction and the dummy variable
FRC which indicates whether the convicted firm is accused of
committing fraud-related crime. If convicted firm’s type of violation is related to fraudulent act, then FRC is equal to one; if not, then zero. The classification of FRC in this paper is shown inAppendix D.
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Antitrust Firms convicted of illegal practices like price-fixing conspiracies, corporate mergers in order to reduce the competitive vigor of particular markets, and predatory acts designed to achieve or maintain monopoly power is said to be violating Antitrust law.
Multi Violation Firms involved in convictions of more than one type of violation at the same time is classified as committing multi-violation
FCPA FCPA stands for Foreign Corruption Practices Act. It prohibits U.S. firms and individuals from paying bribes to foreign officials in furtherance of a business deal and against the foreign official's duties.
Fraud There are various type of fraudulent misconduct noted in Garrett's database. Based on the type of act recognized in Garrett's conviction database, we classify those with key word 'fraud' in type of violation as firms convicted of fraud-related crime. These include mail fraud, wire fraud, bank fraud, security fraud, healthcare fraud, computer fraud, tax fraud and medicare fraud, just to name a few.
FalseStatement This type of violation mainly includes events noted as ''False Statement'' or ''Misreporting'' in Garrett's conviction database, and it usually refers to misstatement of periodic financial report
DefraudUS This type of violation mainly includes events noted as ''Conspiracy to Defraud US'' in Garrett's conviction database.
AntiKickback This type of conviction mainly concerns firms involved in kick-back payment and is recognized through the key word ''Antikickback'' under type of act in Garrett's database
FalseClaim This type of violation mainly includes events noted as ''False Claim'' in Garrett's conviction database.
Non-Type 1 (CrimeSeverity=0)
Misbranded Convictions are identified as misbranded if the key word ''misbranded'' is recognized under type of act in Garrett's database. This type of violation usually refers to misbranding of drugs and food.
Tax Tax-related convictions recognized in Garrett's database includes tax violation, false tax return, tax evasion, tax record violation and tax obstruction. However, tax fraud is classified under sub-classification of crime－ "Fraud"; Therefore, companies noted as committing tax fraud is
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not included in this type.Payment This type of conviction mainly concerns firms involved in improper payments to official or illegal payment to customers.
Environmental Environmental-related conviction includes unauthorized cutting of federal timberlands, hazardous waste processing, transportation of hazardous materials, violation of clean air/water act and corporate misconduct affecting migratory birds.
ExportViolation Export Violation is recognized when one of the following corporate misconduct key words is noted under Garrett's database － "conspiracy to export unlawfully", "smuggling", "export violations", violation of
"export law" and "Arms Export Control Act violations".
IEEPA Convictions are identified as IEEPA if the firm knows and is willful to violate International Emergency Economic Power Act.
Safety This type of conviction mainly includes the violation against safety-related act such as violation of Mine Safety.
FoodDrug A firms is recognized as committing Food&Drug related misconduct when it violates Food, Drug & Cosmetic Act, Poultry Slaughter Laws; or uses unapproved drug or arranges illegal distribution of human growth hormone.
HealthCare This type is identified when key word ''healthcare'' is noted under the type of violation in Garrett's database, excluding healthcare fraud, this type of violation mainly concerns event involving obstruction of justice.
RCRA Defined as Violation of Resource Conservation and Recovery Act
Immigration When key word ''immigration fraud'' or ''visa fraud'' is identified in the database, it is classified as immigration violation.
IllegalWorkers This type of conviction is noted when a firm hires or grant employment to illegal alien workers.
Other Other minor exceptions of corporate conviction type are grouped together as "Other."
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Appendix D
Definition of Violation Type
Crime Type Type of Violation in Conviction database
Fraud-related
Based on both the type of act recognized in Garrett's conviction database and conviction information logged in US Department of Justice (USDOJ), we identify corporate misconduct that may be seen as an act of deceit or misrepresentation of firm’s statement, product or any other information as fraud-related crime. This category includes corporate misconduct such as false statement,false claim, tax fraud, food and drug misbranding, conspiracy to defraud US noted in Garrett’s database.
Under this type of crime, the dummy variable FRC in the regression is equal to one.
Non-fraud-related
Corporate convictions that are not identified as fraud-related crimes are classified as non-fraud-fraud-related crimes.This type of crime includes Antitrust, FCPA, Antikickback,