This study examines the link between corporate social responsibility (CSR) and bank debt. Our focus on banks exploits their specialized role as delegated monitors of the firm. Using a sample of 3996 loans to US firms, we find that firms with social responsibility concerns pay between 7 and 18 basis points more than firms that are more responsible. Lenders are more sensitive to CSR concerns in the absence of security. We document a mixed reaction to discretionary CSR investments. Low-quality borrowers that engage in discretionary CSR spending face higher loan spreads and shorter maturities, but lenders are indifferent to CSR investments by high-quality borrowers.

The impact of corporate social responsibility on the cost of bank loans

This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank–borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988–2000) collected by the Bank of Spain's Credit Register (Central de Informacion de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank–borrower relationship increases the willingness to take more risk.

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Collateral, type of lender and relationship banking as determinants of credit risk

In a sample of 27 OECD countries, this paper investigates whether the event of a national election induces higher stock market volatility. It is found that the countryspecific component of index return variance can easily double during the week around the Election Day, which attests to the fact that investors are surprised by the actual election outcome. Several factors like narrow margin of victory, lack of compulsory voting laws, change in the political orientation of the government, or the failure to form a coalition with a majority of seats in parliament significantly contribute to the magnitude of the election shock. Our findings have important implications for the optimal strategies of risk-averse stock market investors and participants of the option markets.

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Stock market volatility around national elections

This paper examines the determinants of financial covenant thresholds in bank loan agreements and information conveyed through the selection of tight financial covenants. We find that riskier firms and firms with fewer investment opportunities select tighter financial covenants. We also find that selection of tight covenants is associated with improvements in the covenant variable and declines in investment spending and net debt issuance. We observe these changes also for borrowers that do not breach their covenants, suggesting that they are not simply the result of creditor influence conditional on a technical default. Furthermore, we find that violations of tightly set covenants have significantly less of an impact on the borrower’s investment spending and net debt issuance than violations of loosely set covenants. Overall, our results suggest that the selection of tight covenants conveys information concerning future changes in covenant variables and the outcome of covenant violations.

The Information Content of Bank Loan Covenants

This article examines the determinants of financial covenant thresholds in bank loan agreements and information conveyed through the selection of tight financial covenants. We find that riskier firms and firms with fewer investment opportunities select tighter financial covenants. We also find that selection of tight covenants is associated with improvements in the covenant variable and declines in investment spending and net debt issuance. We observe these changes also for borrowers that do not breach their covenants, suggesting that they are not simply the result of creditor influence conditional on a technical default. Furthermore, we find that violations of tightly set covenants have significantly less of an impact on the borrower's investment spending and net debt issuance than violations of loosely set covenants. Overall, our results suggest that the selection of tight covenants conveys information concerning future changes in covenant variables, investment and financial policies, and the outcome of covenant violations. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

Loan Collateral Decisions and Corporate Borrowing Costs

Is presidential cycle in security returns merely a reflection of business conditions

This paper examines the impact of the stance of monetary policy on security returns. The two measures of the stance of monetary policy used, the federal funds rate and an index based on the changes in the discount rate, contain significant information that can be used to forecast expected stock and bond portfolio returns. Specifically, we find that a restrictive (expansive) monetary policy stance decreases (increases) returns of large and small stock portfolios and in some cases, corporate bond portfolios. The monetary policy stance measures have explanatory power in forecasting stock and bond returns, beyond the business conditions proxies.

Economic factors, monetary policy and expected returns on stocks and bonds

I find a positive relation between underwriter reputation and the initial and long-run aftermarket performance of closed-end funds. This relation persists even after controlling for fund characteristics, types, and investment strategies. The positive relation between underwriter reputation and initial returns supports the notion that prestigious investment bankers tend to promote a price run-up in the immediate aftermarket to enhance their reputation with the issuers and the investors. The better long-run performance for funds underwritten by prestigious underwriters suggests that prestigious underwriters protect their reputation by underwriting only high-quality issues that will perform well in the long run.

Underwriter Reputation and Aftermarket Performance of Closed-End Funds

We examine whether the choice of underwriters is consistent with issuing firms trying to minimize underpricing, or to reap other potential associated benefits. After controlling for selectivity bias, we find firms choosing high-ranked underwriters incur lower underpricing and those choosing low-ranked underwriters incur higher underpricing. This result is robust to sub-samples of firms likely to have discretion on the choice of underwriters. The result suggests that issuing firms weigh the tradeoffs between potential benefits and costs of underpricing in their choice of underwriters. It is also consistent with prestigious underwriters using their reputation capital to certify value and reduce uncertainty about the issue. Field of Research: Finance, US Financial Markets and Long Term Funding JEL Classification code: G24; G32

Lena Chua Booth

Papers

Loan Collateral Decisions and Corporate Borrowing Costs

Is presidential cycle in security returns merely a reflection of business conditions

Economic factors, monetary policy and expected returns on stocks and bonds

Underwriter Reputation and Aftermarket Performance of Closed-End Funds

Choice of Underwriters in Initial Public Offerings