Author: Wang, Yang
Title: Two essays on debt financing
Advisors: Wei, K. C. John (AF)
Du, Qianqian (AF)
Degree: Ph.D.
Year: 2022
Subject: Corporations -- Finance
Corporate debt
Hong Kong Polytechnic University -- Dissertations
Department: School of Accounting and Finance
Pages: viii, 120 pages : color illustrations
Language: English
Abstract: The thesis includes two essays on corporate debt contracting. Both essays investigate the factors that affect corporate financing costs. The first essay investigates the impact of political risk on loan contracting. In the second essay, I focus on the anchoring effect in the debt market and will study how a firm's historical borrowing cost serves as the reference point for the current loan issuance.
Specifically, in the first essay, I take advantage of a firm-specific political risk measure and investigate the corresponding impact on a firm's loan contracting, including both pricing terms and non-pricing terms. I find that firms associated with a higher level of firm-specific political risk are charged with higher loan spreads. This effect is amplified for firms with an opaquer information environment and firms with a higher level of financial constraints. Besides, the firm-level political risk also tightens the non-pricing loan terms, such as increasing the likelihood of collateral requirement and covenant restrictions. I establish the causality using an IV approach, a matched sample analysis, and placebo tests. At last, I find that the relationship-based borrowing and lobbying engagement attenuate this adverse impact of political risk.
In the second essay, I study the anchoring effect in the credit market. I propose a rational explanation where the financial experts (i.e., banks) strategically anchor on borrowers' previous high loan costs and charge higher spread. In detail, I find that at the aggregate level, when the average credit spreads decrease since the firm's last borrowing, banks charge higher loan costs than they should charge justified by the firm fundamentals. However, the firm does not pay less when the average spreads increase. Similarly, at the firm level, when the model predicted loan spread is lower than the previous actual loan spread, banks charge higher costs. When the predicted spread is higher, the firm does not pay less. This asymmetric relationship suggests that banks strategically refer to the previous high spreads in loan pricing. Further analyses show that the relationship becomes stronger when banks have more information advantage and when firms are more bank dependent. Overall, the result suggests that the observed anchoring behavior in the financial market can also be rational and strategic.
To summarize, the two essays provide new evidence on the potential determinants that could affect the firm's loan contracting. The second essay also suggests that the well-trained financial exerts could take advantage by pretending to suffer the behavioral biases. These findings could deepen our understanding of loan contracting in the financial market.
Rights: All rights reserved
Access: open access

Files in This Item:
File Description SizeFormat 
6385.pdfFor All Users1.05 MBAdobe PDFView/Open

Copyright Undertaking

As a bona fide Library user, I declare that:

  1. I will abide by the rules and legal ordinances governing copyright regarding the use of the Database.
  2. I will use the Database for the purpose of my research or private study only and not for circulation or further reproduction or any other purpose.
  3. I agree to indemnify and hold the University harmless from and against any loss, damage, cost, liability or expenses arising from copyright infringement or unauthorized usage.

By downloading any item(s) listed above, you acknowledge that you have read and understood the copyright undertaking as stated above, and agree to be bound by all of its terms.

Show full item record

Please use this identifier to cite or link to this item: