Firm prestige reduces the cost of bank loans. Specifically, when borrowers are included in Fortune’s list of ‘America’s Most Admired Companies' (MAC), their loan costs decline by approximately 12.3 bps on average. The effect appears causal. The negative relation between prestige and loan costs is more pronounced for borrowers in more competitive industries and with higher information uncertainty. Banks with weaker bargaining power offer favorable loan terms to the MAC ranked borrowers when they face a high degree of competition from other banks. The MAC ranking appears to be used by these banks as a summary statistic for loan quality in the face of competition. Copyright © 2022 Informa UK Limited.
CitationDai, Y., Kordsachia, O., & Tan, W. (2022). How does firm prestige affect the cost of bank loans? The European Journal of Finance. Advance online publication. doi: 10.1080/1351847X.2022.2057807
- Bank loan spread
- Firm prestige
- Most admired companies
- Social capital