Do cultural differences between contracting parties matter? Evidence from syndicated bank loans

Mariassunta Giannetti*, Yishay Yafeh

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

195 Scopus citations

Abstract

We investigate whether cultural differences between professional decision makers affect financial contracts in a large data set of international syndicated bank loans. We find that more culturally distant lead banks offer borrowers smaller loans at a higher interest rate and are more likely to require third-party guarantees. These effects do not disappear following repeated interaction between borrower and lender and are economically sizable: A one-standard-deviation increase in cultural distance, approximately the distance between Canada and the United States or between Japan and South Korea, is associated with a 6.5 basis point higher loan spread; the loan spread increases by about 23 basis points if the bank-firm match involves culturally more distant parties, for example, from Japan and the United States. We also find that cultural differences not only affect the relation between borrower and lender, but also hamper risk sharing between participant banks and culturally distant lead banks.

Original languageAmerican English
Pages (from-to)365-383
Number of pages19
JournalManagement Science
Volume58
Issue number2
DOIs
StatePublished - Feb 2012

Keywords

  • Behavioral bias
  • Culture
  • Financial contracts
  • Risk sharing

Fingerprint

Dive into the research topics of 'Do cultural differences between contracting parties matter? Evidence from syndicated bank loans'. Together they form a unique fingerprint.

Cite this