Does Borrowing from Banks Cost More than Borrowing from the Market? (2019) by Michael Schwert
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This paper investigates the pricing of bank loans in a sample of new loans to firmswith outstanding bonds.
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After accounting for seniority, banks earn an economically large interest rate premium relative to the price of credit risk in the bond market.
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To establish this result, I use intuition from a reduced-form model of credit risk to show that average loan spreads are three times higher than implied by bond spreads and relative losses in default.
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To quantify the premium at the loan level, I apply a structural model to a subsample of secured term loans and estimate an average loanpremium of 240 bps.
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I rule out general mispricing of seniority, liquidity, fixed costs, and capital charges as drivers of the premium. My findings imply that firms place ahigh value on bank services other than the simple provision of debt capital.
Table 1: Summary Statistics on Loan and Bond Recovery Rates
Table 3: Summary Statistics: Full Bond-Loan Sample
Figure 2: Non-Parametric Regressions of Bond-Implied Loan Spreads on Distance-to-Default
Internet Appendix (see Support Information)