Abstract
Firms borrowing from both banks and the corporate bond market pay a substantial premium on bank loans, raising questions about firms’ bargaining power and banks’ competition. In this paper, I show that a large portion of this premium compensates banks for facilitating out-of-court restructurings. I estimate the loan premium and use a 2014 U.S. court ruling, which impeded out-of-court restructurings, as a natural experiment. Following the ruling, affected firms experienced an 80-90 bps reduction in the loan premium, due to reduced restructuring opportunities and a diminished potential to avoid bankruptcy costs. These findings suggest that the renegotiation flexibility provided by banks is a key driver of the loan premium, highlighting the unique value that bank lending offers beyond the capital market.
| Original language | English |
|---|---|
| Publication date | 2025 |
| Number of pages | 48 |
| Publication status | Published - 2025 |
| Event | 60th Annual Conference of the Western Finance Association. WFA 2025 - Snowbird Resort, Snowbird, United States Duration: 22 Jun 2025 → 25 Jun 2025 Conference number: 60 https://westernfinance.org/wp-content/uploads/2025.pdf |
Conference
| Conference | 60th Annual Conference of the Western Finance Association. WFA 2025 |
|---|---|
| Number | 60 |
| Location | Snowbird Resort |
| Country/Territory | United States |
| City | Snowbird |
| Period | 22/06/2025 → 25/06/2025 |
| Internet address |
Keywords
- Bank loan
- Corporate bond
- Loan premium
- Renegotiation
- Prepayment risk
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