Offshore operations and bank loan contracting : Evidence from firms that set up subsidiaries in offshore financial centers

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

10 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)335-355
Journal / PublicationJournal of Corporate Finance
Volume37
Online published19 Jan 2016
Publication statusPublished - Apr 2016
Externally publishedYes

Abstract

We examine the effects of a multinational firm's subsidiary operations in offshore financial centers (OFCs) on bank loan contracting terms. Using a propensity score matched cross-country sample of firms with and without OFC subsidiaries, we find that firms with OFC subsidiaries receive less favorable loan terms than firms without OFC subsidiaries. The results from a difference-in-differences analysis and an analysis of a firm's mutation from a non-OFC firm to an OFC firm support the causal effect of offshore operations on the unfavorable loan terms. Furthermore, focusing on firms with OFC subsidiaries, we find that the intensity of offshore operations affects loan terms unfavorably. We also find that the unfavorable effect is more pronounced for more opaque firms and for firms that are headquartered in countries or jurisdictions with weaker legal enforcement. Our findings indicate that banks view offshore operations of borrowers as a credit risk-increasing factor.

Research Area(s)

  • Agency problem, Information risk, Legal enforcement, Loan contracting, Offshore financial center, Offshore operation