3. Hypotheses and Empirical Models
3.2. Business cycles, banking crises, and the 2007–2008 financial crisis
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
nonbank-dependent firms will pay lower spreads than bank-dependent firms. Therefore, we expect α to be significantly negative. Bank regulatory includes the indices of bank regulatory and supervision policies as previously discussed. We expect β to be significantly positive because banks that are subject to more restrictive regulations will charge higher interests to compensate for the regulatory costs they bear. We use the interactions between MRPBOND and bank regulatory indices to capture the impact of bank regulations on hold-up effects. If Hypothesis 1 holds, stricter bank regulations will be positively related to higher loan spreads for bank-dependent firms compared to nonbank-dependent firms. Therefore, we expect γ to be significantly negative. X and Y represent the variables that control for the borrowing firms and loan characteristics, respectively.
3.2. Business cycles, banking crises, and the 2007–2008 financial crisis
Rajan (1992) illustrates that when borrowers’ probability of success declines, outside banks are less aggressive to bid on loans, thereby increasing the hold-up power of inside banks. Santos and Winton (2008) find that bank-dependent firms pay significantly higher loan spreads than nonbank-dependent firms during recessions but not expansions. We use Branun and Larrain’s (2005) definition of recessions in the
‧
countries of the borrowing firms to examine whether this relation holds globally.
In addition, we investigate the impact on the hold-up effects of banking crises and the 2007–2008 financial crisis. Whereas recessions reflect borrowers’ risk, banking crises reflect the financial distress of and liquidity shock to the banking industry. When inside banks suffer a liquidity shock, their ability to hold up borrowers decreases and the probability of bidding by outside banks increases. As such, the hold-up power of inside banks is weaker when the banking industry suffers a liquidity shock. The impact of a banking crisis varies across different banks; some are more vulnerable to a shock than others. Banks that are more severely affected by the crisis can lose market shares to banks that are less affected. As a result, crisis-affected banks lose the ability to exploit their monopoly power. For example, Chodorow-Reich (2014) show that during the 2007–2008 financial crisis, Credit Suisse, which suffered huge losses from its investments in mortgage-backed securities, reduced its lending in the syndicated market by almost 79% compared to the precrisis period. Comparatively, U.S. Bankcorp, which was less affected by the crisis, reduced its lending by only 14%. In this case, the role of banks that are severely affected by the crisis declines, as does their ability to hold up borrowers.
The 2007–2008 financial crisis represents a systematic economic and financial shock to the whole economy and affected both the real and financial sectors. In addition
‧
further affect hold-up effects for two reasons: First, the credit rating crisis diminished the informational content embedded in public bonds, and, second, ratings of most public bonds deteoriated.During the 2007–2008 financial crisis, credit rating agencies were highly criticized for the inaccuracy of their ratings for structured financial products. In fact, credit ratings agencies received blame for creating the financial crisis (Lahinsky, 2008). An article in USA Today reports that the three major credit rating agencies were trying to restore their reputations six years after the 2007–2008 financial crisis (Krantz, 2013). This reputational damage to credit rating agencies may has spill-over effects. Jaballah (2015) finds that investors neglected rating changes during the financial crisis, and Bedendo et al. (2013) report a possible spill-over effect of reputational damage to bond rating services. If the information content of bond ratings is substantially weakened, issuing public bonds may fail to reduce the informational advantage of inside banks.
Consequently, nondependent firms do not enjoy lower loan spreads than bank-dependent firms.
Santos and Winton (2008) show that during recessions, rates for bank-dependent firms are higher than those for firms with access to public bonds markets; however, the difference is mainly driven by investment-grade firms. Similarly, Hale and Santos
‧
(2009) show that only firms with a rating of investment grade pay significantly lower rates after a bond IPO. These results suggest that only public bonds that convey favorable information about a firm’s credit worthiness reduce the informational rent
captured by inside banks. If a bond is rated below investment rate or not rated, the firm does not pay significantly less interests than bank-dependent firms. If the majority of the public bond ratings deteriorates during the 2007–2008 financial crisis, access to public bond markets may not result in lower interests on bank loans. Figures 1 and 2, the difference between the loan spreads of bank-dependent and non-bank-dependent firms had narrowed during the crisis. This discussion lead to our next two hypotheses:
Hypothesis 2: During a banking crisis, the interest rate difference between bank-dependent and nonbank bank-dependent firms is insignificant.
Hypothesis 3: During the 2007–2008 financial crisis, the interest rate difference between bank-dependent and non-bank dependent firms is insignificant.
We use the following two models to test Hypotheses 2 and 3, respectively:
𝐿𝑂𝐴𝑁𝑆𝑃𝑅𝐸𝐴𝐷 = 𝑐 + 𝛼 ∙ 𝑀𝑅𝑃𝐵𝑂𝑁𝐷 + 𝜇 ∙ 𝐵𝐴𝑁𝐾_𝐶𝑅𝐼𝑆𝐼𝑆 + 𝜌 ∙ 𝑀𝑅𝑃𝐵𝑂𝑁𝐷 × 𝐵𝐴𝑁𝐾_𝐶𝑅𝐼𝑆𝐼𝑆 + ∑ 𝛿 ∙ 𝑋 + ∑ 𝜃 ∙ 𝑌 + 𝜀 (2)
𝐿𝑂𝐴𝑁𝑆𝑃𝑅𝐸𝐴𝐷 = 𝑐 + 𝛼 ∙ 𝑀𝑅𝑃𝐵𝑂𝑁𝐷 + 𝜂 ∙ 2007 − 2008_𝐶𝑅𝐼𝑆𝐼𝑆 + 𝜑 ∙ 𝑀𝑅𝑃𝐵𝑂𝑁𝐷 × 2007 − 2008_𝐶𝑅𝐼𝑆𝐼𝑆 + ∑ 𝛿 ∙ 𝑋 + ∑ 𝜃 ∙ 𝑌 + 𝜀 (3)
During a banking crisis, banks may suffer from liquidity shock and thus charge
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
higher loan spreads. Hence, in line with previous research (Santos, 2011; Chodorow-Reich, 2014), we expect μ to be significantly positive. To investigate the impact of banking crises on inside banks’ hold-up power, we add the interaction of MRPBOND
and BANK_CRISIS to the model. If Hypothesis 2 will not hold, bank-dependent firms will pay significantly lower rates than nonbank-dependent firms during a financial crisis.
Therefore, we expect the coefficient ρ is insignificantly different from zero. Similarly,
if Hypothesis 3 holds, the coefficient of MRPBOND*2007–2008_CRISIS, φ, will also be insignificantly different from zero.