TY - JOUR
T1 - The co-insurance effect hypothesis and the cost of bank loans
T2 - Evidence from Indonesian pyramidal business groups
AU - Chandera, Yane
AU - Afriani, Cynthia
AU - Husodo, Zaafri Ananto
AU - Setia-Atmaja, Lukas
N1 - Funding Information:
This work was supported by the National Competitive Research Grant Program of the Ministry of Research, Technology, and Higher Education of the Republic of Indonesia ( 025/E3/2017 ) (2017) and the Internal Research Grant Program at Universitas Prasetiya Mulya , ( 044-VIII-2014 ) Indonesia (2015–2017). The authors would like to thank Professor Sidharta Utama at Universitas Indonesia for providing the ownership data, and all participants at the 2017 Indonesian Finance Association (IndonesianFA) Conference and the 4th Sebelas Maret International Conference on Business, Economics and Social Sciences (SMICBES) for helpful comments. Appendix A
Publisher Copyright:
© 2018 Elsevier Inc.
PY - 2018/8
Y1 - 2018/8
N2 - This paper empirically tests the relationship between the position of a firm in a pyramidal business group and the firm's bank loan spread, in an Asian emerging market with a high incidence of pyramidal firms, a weak legal system, and high corporate dependency on bank loans. We use a data set of bank loan contracts for Indonesian pyramidal firms from 2006 to 2016. We find that banks charge lower loan prices to firms that are located in lower layers of a pyramidal chain, even after we control for many factors including expropriation risk. The finding suggests that banks consider that lower-layer firms receive a greater co-insurance effect than upper-layer firms because more internal resources are available down the ownership chain to lower credit risk.
AB - This paper empirically tests the relationship between the position of a firm in a pyramidal business group and the firm's bank loan spread, in an Asian emerging market with a high incidence of pyramidal firms, a weak legal system, and high corporate dependency on bank loans. We use a data set of bank loan contracts for Indonesian pyramidal firms from 2006 to 2016. We find that banks charge lower loan prices to firms that are located in lower layers of a pyramidal chain, even after we control for many factors including expropriation risk. The finding suggests that banks consider that lower-layer firms receive a greater co-insurance effect than upper-layer firms because more internal resources are available down the ownership chain to lower credit risk.
KW - Bank loan
KW - Business group
KW - Co-insurance effect
KW - Cost of debt
KW - Pyramid
UR - http://www.scopus.com/inward/record.url?scp=85046716390&partnerID=8YFLogxK
U2 - 10.1016/j.gfj.2018.03.003
DO - 10.1016/j.gfj.2018.03.003
M3 - Article
AN - SCOPUS:85046716390
VL - 37
SP - 100
EP - 122
JO - Global Finance Journal
JF - Global Finance Journal
SN - 1044-0283
ER -