Corporate Cost of Borrowing: TRACE on Syndicated Loans

2010 October 04

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Markus Fischer, E-Finance Lab]

Traditionally, the cost of debt is solely seen dependent on firm or debt characteristics. However, increased price transparency as occurred in the corporate bond market with the introduction of TRACE reduces corporate bond yields (Goldstein et al., 2007). We aim to measure the 'spill-over' effect of increased price transparency of one major corporate financing source (corporate bonds) on the cost of corporate borrowing of another major financing alternative (syndicated loans). Our results indicate that loans to firms with no bonds outstanding became more expensive after the complete implementation of TRACE compared to before-TRACE-times. On the contrary, forfirms with bonds outstanding the average spread is lower after the complete implementation of TRACE. Further, we find that first-disseminated firms (first-stage firms) pay ceteris paribus lower loan spreads compared to later-disseminated firms (straggler-firms). However, this difference vanishes after all firms with bonds are captured by the TRACE system. We can conclude that a positive 'spill-over' effect of TRACE on loan spreads is not only present for firms with bonds compared to firms without bonds but has also been visible among firms with bonds outstanding. Our results are consistent to the inclusion of additional robustness checks.