Coinsurance Effect and Cost of Bank Loans: Evidence from Indonesian Pyramidal Business Groups

This paper examines whether coinsurance effect influences cost of bank loans by studying the relationship between position of firms within pyramidal business groups and loan spread. We examine this issue from the perspective of creditors that are not within those groups using a data set on bank loan contracts of Indonesian pyramidal firms (2006-2016). Consistent with coinsurance effect argument, we find banks charge lower loan prices to firms located at lower layers of a pyramidal chain. This confirms the assertion that within a pyramid, more internal resources are available down the ownership chain to bail out troubled member firms from bankruptcy or lower member firms' credit risk.