Public disclosure and bank loan contracting: evidence from emerging markets

Public disclosure and bank loancontracting: evidence from

emerging marketsIftekhar Hasan

Fordham University, New York, New York, USA and Bank of Finland,Finland, and

Liang SongMichigan Technological University, Houghton, Michigan, USA

Abstract

Purpose – The purpose of this paper is to fill this void in the existing literature and investigate howfirms’ disclosure policies influence bank loan contracting in emerging markets after controlling for theinfluence of borrowers’ private information obtained by banks. Furthermore, the paper examines howfirms’ disclosure and non-disclosure governance interact to affect financial contracts.Design/methodology/approach – The key variables Disclosure and Firm Governance are basedon a survey by Credit Lyonnais Securities Asia (CLSA) in 2000. The paper hand-merges CLSAdisclosure and governance data with the Dealscan database and Worldscope database by firm names.The paper conducts a multivariate analysis to investigate how firms’ disclosure policies influencebank loan contracting and how firms’ disclosure and non-disclosure governance interact to affectfinancial contracts.Findings – The authors found that firms with superior disclosure policies obtain bank loans withmore favorable loan contracting terms, such as larger amounts, longer maturity, and lower spread.In addition, the effects of disclosure on bank loan contracting are more pronounced for borrowers withsuperior firm-level non-disclosure governance or firms located in a country with better country-levelgovernance.Originality/value – The paper provides a more comprehensive view of the effects of corporatedisclosure has on financial contracts in emerging economies.

Keywords Disclosure, Emerging market, Bank loan contracting

Paper type Research paper

1. IntroductionEmpirical studies have shown that firms with superior disclosure policies have lowerequity capital costs and pay lower interest rates on public debt (e.g. Botosan, 1997;Botosan and Plumlee, 2002; Sengupta, 1998; Welker, 1995). However, academics havepaid comparatively little attention to the effects of superior disclosure scores on privatedebt contracting, despite the fact that bank loans are the largest source of externalfinancing for firms, not equity and bond financing (Petersen and Rajan, 1994)[1]. In ourpaper, we fill this void and investigate how firms’ disclosure policies influence bankloan contracting after controlling for the influence of borrowers’ private informationobtained by banks. Furthermore, we examine how disclosure and non-disclosuregovernance interact to affect financial contracts.

We focus on emerging economies because these countries provide a perfect testingground for our research questions. Existing literature has shown that banks depend oncontinuing lending relationships to gather private information from borrowers and are

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Asian Review of AccountingVol. 22 No. 1, 2014pp. 2-19r Emerald Group Publishing Limited1321-7348DOI 10.1108/ARA-10-2013-0069 JEL Classifications — M41; G15; G24; G38

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therefore less dependent on public information disclosure as compared to public bondholders and equity investors (Benston and Smith, 1976; Fama, 1985). In emergingmarkets, banks are more likely to depend on their private information communicationmechanism with firms because borrowers may withhold useful information or disclosefalse information as compared to developed countries, due to relatively poor firm- andcountry-level governance (Mazumdar and Sengupta, 2005). Thus, the relationshipbetween disclosure and bank loan contracting is more puzzling in emerging economiesas compared to developed countries. Furthermore, due to their wide variations incountry and firm-level corporate governance ratings, emerging markets are bettersamples in which to test whether the effects of firm-level disclosure are morepronounced when determining loan contracts for firms with superior country-levelgovernance and firm-level non-disclosure governance. For example, Doidge et al. (2007)find that o40 percent of the variance in emerging country firm governance and morethan 70 percent of the variance in developed market firm governance is determined bycountry dummy variables.

In order to build our sample and empirically test our research questions, we hand-matchseveral databases, including Dealscan and Worldscope. To control for the effects ofprivate information gathered by banks, we construct a variable based on borrowers’previous lending relationships (Benston and Smith, 1976; Fama, 1985). Employingfirm-level disclosure rankings across 11 emerging markets, we find that a onestandard deviation increase in public disclosure raises the loan amount by $5.93million, adds to the loan maturity by 2.73 months, and reduces the loan spread by4.43 basis points relative to the mean value of the sample. These results suggestthat banks still depend on public disclosure to make their lending decisions and thatprivate information from borrowers cannot completely eliminate informationasymmetry. Public disclosure may reduce banks’ information-gathering costs andtheir efforts to monitor borrowers, which is reflected in more favorable loan contractterms (Mazumdar and Sengupta, 2005). These results are consistent with the existingliterature (e.g. Blackwell et al., 1998; Booth, 1992), which has shown that banksincorporate public information to write their loan contracts. In addition, we find thatthe effects of firm-level disclosure on bank loan contracting are more significant forfirms with superior firm-level non-disclosure governance or firms located in a country withbetter country-level governance. These results imply that banks highly value informationdisclosed by well-governed borrowers.

This research has several important contributions to the literature. First, recentempirical studies have shown that firms with superior disclosure policies have lowercosts of capital in the US market (e.g. Botosan, 1997; Mazumdar and Sengupta, 2005;Sengupta, 1998). However, the results may not be generalized to the emerging marketsbecause the weak legal environment in developing countries causes investors to payless attention to information provided by firms (Morck et al., 2000). In addition, publicdisclosure generated in a weak corporate governance framework is less credibleand a bank may ignore it (Mazumdar and Sengupta, 2005). We extend this strand ofliterature by showing that corporate disclosure also has a significant impact on bankloan contracts by employing the emerging market sample.

Second, recent empirical studies have demonstrated that firms with superiordisclosure policies pay lower interest rates on private debt (Mazumdar and Sengupta,2005). However, bank loans are complex contracts and the interest rate alone is notenough to reflect the cost of capital (Qian and Strahan, 2007). For example, if aborrower only has access to loans of smaller amounts with the same interest rate, they

3

Public disclosureand bank loan

contracting

must go to the capital market more often and incur more transaction costs to obtainthe same amount of external financing. We extend this strand of literature byinvestigating the effects of disclosure on not only the interest rate, but also the loanamount and maturity. Thus, we provide a more comprehensive view of the effects ofcorporate disclosure has on financial contracts.

Third, the existing literature has demonstrated the effects of accounting quality,financial restatement, and internal control weakness in the US syndicated loanmarket (Bharath et al., 2008; Costello and Wittenberg-Moerman, 2011; Graham et al.,2008; Kim et al., 2011). At the international level, Bae and Goyal (2009) and Qian andStrahan (2007) have examined the influence of country-level governance on bank loancontracting process. However, the variation of corporate disclosure cannot be fullyexplained by country-level variables (Klapper and Love, 2004). We contribute to thisthread of literature by showing firm-level corporate disclosure has an incrementaleffect on bank loan contracts after controlling for country-level legal environments.

Finally, the existing research includes firm-level disclosure as an integral part ofgovernance mechanisms (e.g. Klapper and Love, 2004; Mitton, 2002). In the syndicatedloan market, Francis et al. (2012) find that the degree of firm-level corporate governance,including both corporate disclosure and non-disclosure governance standards, hasa significant impact on financial contracts. We add to this strand of literature byhighlighting the individual effects of disclosure and examining how disclosure andnon-disclosure governance ratings interact to affect bank loan contracting. Thus, we canpresent a detailed view of how different components of corporate governance affect thebank loan contracting process.

We acknowledge that only large firms are included in our sample because smallfirms are less likely to have access to the syndicated loan market. Future research mayexplore the relationship between disclosure and private debt for small firms inemerging markets using other data sets. In addition, our three dependent variablesincluding loan size, loan maturity, and loan spread may interact. We add loan amountand loan maturity into the regression to determine loan spread, and our results arestill hold[2]. However, we do not add loan spread to the regression to determine loanamount and maturity because it will significantly reduce our sample size. We leave thisproblem for future research.

The rest of the paper is organized as follows. Section 2 discusses our hypotheses.Section 3 presents our sample and descriptive Statistics. Section 4 describes theempirical analysis. Section 5 concludes.

2. Hypotheses2.1 Disclosure and bank loan contractingBanks are crucial credit suppliers for firms in emerging markets because of theirunderdeveloped capital markets (Demirguc-Kunt and Levine, 2001). However, therelation between the creditors’ lending decisions and firms’ disclosure scores remainsambiguous. On the one hand, it seems that banks have superior information aboutborrowers and depend heavily on their private information gathering and processingmechanisms as compared to bond and equity holders (Leftwich, 1983). For example,banks obtain private information about borrowers by developing their own informationcollecting ability (Benston and Smith, 1976). Banks also depend on a long-term lendingrelationship with borrowers to gain access to their private information. James (1987)has shown that there is a positive abnormal equity return when a firm successfullyobtains a loan agreement from a bank, suggesting that equity investors highly value

4

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firms, which have passed banks’ scrutiny in the lending process. Moreover, the legalenvironment and firm governance mechanisms in emerging economies are not as matureas those in developed countries, and firms in emerging economies are likely to hidevaluable information related to their default risk and may disclose less truthfully(Mazumdar and Sengupta, 2005). Thus, banks may depend more on their own privateinformation when writing loan contracts, rather than on public disclosure. Based onthese arguments, there is no significant relationship between borrowers’ disclosure levelsand their bank loan contracting terms.

On the other hand, public disclosure is still an important source. Banks use publicdisclosure to obtain information related to borrowers’ credit risk because privateinformation from borrowers cannot fully eliminate information asymmetry betweencreditors and borrowers, and public disclosure can reduce banks’ information searchcosts and monitoring efforts (Mazumdar and Sengupta, 2005). For example, Booth(1992) has shown that banks incorporate public information on debt ratings to writetheir loan contracts. Blackwell et al. (1998) have found that banks also depend onassurances provided by auditors when they make a lending decision. Thus, banksshould still value borrowers’ public disclosure when they write a loan contract, as itcan reduce borrowers’ information risk.

According to the existing literature, the information asymmetry between creditorsand borrowers is crucial in determining bank loan contracting terms. For example,Jappelli and Pagano (1993) argue that banks provide more credit by increasing theamount of a single loan if banks are less opaque. Diamond (2004) illustrates thatbanks prefer to provide short-term loans if a borrower has higher information riskbecause it is easier for them to review and modify their lending decisions in the future.Freixas and Rochet (1997) establish that information asymmetry is the most importantdeterminant of loan spread. Thus, we hypothesize that:

H1. Well-disclosed firms obtain bank loan contracts with more favorable terms,such as larger amounts, longer maturity, and lower spread.

2.2 Disclosure, governance, and bank loan contractingThe direct link between disclosure and bank loan contracting has been established inthe existing literature. For example, Mazumdar and Sengupta (2005) find that US firmswith superior disclosure policies pay lower interest rates on private debt. The extantliterature has also shown the direct relationship between governance and bank loancontracts. For instance, Bae and Goyal (2009) and Qian and Strahan (2007) examinethe influence of country-level governance on the bank loan contracting process. Franciset al. (2012) show that the degree of firm-level corporate governance has a significantimpact on financial contracts.

However, it is still an empirical question whether public disclosure matters more orless for firms with superior governance when determining bank loan contracting. Priorresearch has found that poor corporate governance is associated with a lower level oftransparency (e.g. Francis et al., 2005)[3]. When banks write a loan contract, they areconcerned with two possibilities: borrowers may withhold valuable information relatedto their default risk and borrowers may intentionally disclose false information(Mazumdar and Sengupta, 2005). These agency problems may reduce the credibility ofcorporate disclosure and let banks charge more by writing unfavorable loan contracts.These agency problems may be more severe in emerging economies because the legal

5


contracting

system and firm-level governance mechanisms are not as mature as those foundin developed countries. Superior firm- and country-level governance can reducethese agency problems, and banks should provide more rewards for disclosure bywell-governed firms. Thus, we hypothesize that:

H2. The effects of firm-level disclosure on bank loan contracting terms are morepronounced for firms with superior governance.

3. Data3.1 Variable definitionOur key variables Disclosure and Firm_Governance are based on a survey byCredit Lyonnais Securities Asia (CLSA) in 2000. The survey by CLSA covers seven keycategories: transparency, management discipline, independence, accountability,responsibility, fairness, and social awareness. Each category includes six to tenquestions. CLSA’s analysts answer zero/one to each question for the company theycovered. The score of each category is equal to the sum of the answers scaled by thetotal number of questions in each category.

To avoid analysts’ subjective biases, 70 percent of the questions in the CLSA surveyare based on facts (Klapper and Love, 2004). The other questions are based on theanalyst’s experience in covering the firm (Kevin et al., 2009). In addition, CLSA data isthe only available comprehensive measures of disclosure and governance in emergingeconomies and its validity has been corroborated by the existing literature (e.g. Doidgeet al., 2007).

The variable Disclosure is measured as the score of the transparency category,which refers to whether outside investors can assess the true financial situation of acompany. Questions include: whether the company can disclose its financial targets,such as three- and five-year ROA/ROE; whether the company can release annual,semi-annual, and quarterly reports in a timely way; whether the company can disclosemarket-sensitive information in a clear, informative, and prompt way, and with nopre-disclosure leakage; whether the company can update its web site in a prompt way;and whether investors have access to the management team.

The variable Firm_Governance is defined as the average value of the scoresof the other five categories: management discipline, independence, accountability,responsibility, and fairness. Questions in the management discipline category measurewhether senior management has a commitment to put emphasis on shareholder valueand financial discipline. Questions in the independence category assess whether theboards of directors are independent of controlling shareholders and top management.Questions in the accountability category measure whether senior management isresponsible for the board of directors. Questions in the responsibility category arerelated to whether the board of directors can take effective measures to deal withmismanagement. Questions in the fairness category address whether controllingshareholders and top management treat minority shareholders fairly[4].

We use the world governance index from the World Bank to construct ourcountry-level governance variable Country_Governance. The variable GDP_Growth isdefined as the percent change in a country’s GDP per capita relative to the previousyear, which is taken from the World Development Indicator database.

The firm characteristics are constructed based on the data from the Worldscopedatabase. The variable Firm_Size is defined as the logarithm of a firm’s total

6

ARA22,1

assets. The variable Firm_Leverage is equal to total debt divided by total assets.The variable Firm_Profitability is measured as net income divided by totalassets. The variable Firm_Tangibility is constructed as property plant andequipment divided by total assets.

The existing literature has shown that banks depend on continuing lendingrelationships to gather private information from borrowers (Benston and Smith, 1976;Fama, 1985). To control for the effects of borrowers’ private information obtained bybanks, we define the variable Prior_Relationship as the logarithm of the sum between1 and the number of previous loans by firms.

We construct bank loan variables based on data from the Dealscan database[5].We employ the variable Loan_Amount to measure the amount of the loan. We usethe variable Loan_Maturity to define the loan maturity. We construct the variableLoan_Spread to measure the bank loan interest rate, which is defined as the all-inspread drawn in the Dealscan database. We create a series of dummy variables,Loan_Types, which are equal to 1 if a loan is a term loan, revolver more than one year,364-day facility, or revolver less than one year.

3.2 Sample and descriptive statisticsThe CLSA report covers 495 companies in 25 countries. We hand-merge CLSAdisclosure and governance data with the Dealscan database and Worldscope databaseby firm names. Our disclosure data are taken from 2000. We include loans originatedfrom 2000 to 2005 to ensure that our sample is not too small[6]. This can also mitigatethe concern of reverse causality problems (Francis et al., 2012). Specifically, firms mayincrease the level of their disclosure in order to get a better deal right before they go tothe capital market. Thus, the disclosure level several years ago before a deal may betterreflect the true situation of the firm’s disclosure policies and is less likely determinedby the firms’ future financing decisions. We do not include bank borrowers in oursample because their loan contracts are different than those of industrial firms. We alsoexclude countries in which there are fewer than five firms. Our final sample includes679 loans for 132 firms in 11 countries/regions: Brazil, Chile, Hong Kong, India, SouthKorea, Malaysia, the Philippines, Singapore, South Africa, Taiwan, and Thailand.In our sample, 501 loans are term loans. In all, 23 loans are revolver more than one year.One loan is 364-day facility. Others are revolver less than one year.

Table I presents summary statistics for our variables Disclosure andFirm_Governance in the full sample and by the borrower country. As shown inPanel A, there are huge variations in terms of the firm-level disclosure index for thewhole sample. For example, in the whole sample, the lowest value of the variableDisclosure is 10 and the highest value of the variable Disclosure is 100. The SD¼ 21.38and the mean value is equal to 59.09. As shown in Panel B, the firm-level governanceindex also varies for each country. For instance, in Brazil, the lowest value of thevariable Firm_Governance is 50 and the highest value of the variableFirm_Governance is 100. The SD¼ 14.41 and the mean value equals 80.77.

Panel A of Table II presents summary statistics for the other variables used in ourempirical analysis. The average value of the variable Coutnry_Governance is 65.85 andthe standard deviation equals 16.05. The average GDP growth for our sample countriesis 4.34 percent and the average loan size is equal to $154.13 million. The mean value ofthe loan maturity is 49.08 months and the average value of the loan spread is 138.03basis points. Panel B of Table II describes the correlation matrix. These summarystatistics are consistent with the results reported in the literature.

7


contracting

4. Empirical results4.1 Univariate analysisIn this section, we conduct a univariate analysis to investigate how firms’ disclosurepolicies influence bank loan contracting. Specifically, we partition the entire sampleinto two subsamples based on whether the observation has lower or higher thanthe median value of the variable Disclosure. Then we report the mean values of thevariables Loan_Amount, Loan_Maturity, and Loan_Spread in each of these twosubsamples and compare the difference between these two mean values of each loanvariable. As shown in Table III, in the subsample with lower than the median value ofthe variable Disclosure, the mean value of the loan size, the loan maturity, and the loanspread are $147.78 million, 44.82 months, and 139.80 basis points, respectively.In contrast, in the subsample with higher than the median value of the variableDisclosure, the average value of the loan size, the loan maturity, and the loan spread are$162.44 million, 54.67 months, and 136.55 basis points, respectively. The differencesbetween the two mean values of each loan variable are all statistically significant.These results suggest that firms with superior disclosure policy obtain bank loanswith larger amounts, longer maturity, and lower spread.

Mean SD Minimum Maximum

Panel A: DisclosureAll sample 59.09 21.38 10.00 100.00Brazil 80.77 14.41 50.00 100.00Chile 70.00 18.71 50.00 90.00Hong Kong 66.00 15.49 40.00 90.00India 36.88 15.80 10.00 60.00South Korea 50.00 10.54 40.00 70.00Malaysia 62.22 18.01 30.00 100.00Philippines 40.00 14.14 20.00 70.00Singapore 62.78 21.09 30.00 90.00South Africa 52.00 19.24 30.00 80.00Taiwan 62.14 25.47 20.00 100.00Thailand 67.50 16.69 40.00 90.00Panel B: Firm_GovernanceAll sample 53.33 14.30 17.90 89.16Brazil 55.22 6.14 42.46 63.86Chile 61.49 4.24 54.64 65.10Hong Kong 50.94 14.64 25.08 78.02India 55.28 10.56 38.52 79.60South Korea 39.92 7.92 32.12 58.98Malaysia 51.68 14.92 17.90 81.10Philippines 39.16 15.78 19.28 63.22Singapore 64.76 11.25 48.44 89.16South Africa 67.15 9.37 53.66 76.92Taiwan 53.04 10.53 39.92 69.88Thailand 50.10 21.64 24.00 80.82

Notes: Our sample includes 697 bank loan observations from 2000 to 2005. Panel A presents mean,standard deviation, minimum, and maximum of Disclosure in the full sample and by borrower country;Panel B presents mean, standard deviation, minimum, and maximum of Firm_Governance in the fullsample and by the borrower country. We describe the details of definitions of all the variables inAppendix

Table I.Summary statistics forDisclosure andFirm_Governance

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ARA22,1

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9


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10

ARA22,1

4.2 Multivariate analysisTo test for the effects on bank loan contracts of firm-level disclosure policies (H1),we estimate the following equation:

Bank loan contracting terms ¼aþ b1 Disclosure

þ b2 Control variables

þ Industry effects

þ Year effectsþ e

ð1Þ

where bank loan contracting terms include the logarithm of Loan_Amount,Loan_Maturity, and Loan_Spread. The variable Disclosure is our primary pointof interest. We expect that b140 if the dependent variable is the logarithm ofLoan_Amount or the logarithm of Loan_Maturity. Additionally, we expect that b1o0if the dependent variable is the logarithm of Loan_Spread. Control variables includeCountry_Governance, Firm_Size, Firm_Leverage, Firm_Profitability, Firm_Tangibility,Firm_Governance, Prior_Relationship, GDP_Growth, and Loan_Types. We expect thatfirms with superior country- and firm-level governance obtain more favorable loancontracting terms. We also expect that borrowers with larger firm size, lower leverage,higher profitability, higher tangibility, and more exposure in the loan market obtainmore favorable loan contracting terms. Finally, the regressions include industryand year effects. The t-statistics are calculated using standard errors corrected forfirm-level clustering.

Estimates of Equation (1) with the logarithm of Loan_Amount, the logarithm ofLoan_Maturity, and the logarithm of Loan_Spread as the dependent variable areshown in Tables IV-VI, respectively. In the first column, we include the variableDisclosure and control for Firm_Governance, Prior_Relationship, and GDP_Growth.In the second column, we add the variable Country_Governance. In the third column,we further control for firm-level variables, including Firm_Size, Firm_Leverage,Firm_Profitability, and Firm_Tangibility.

As shown in Table IV, the coefficients of the variable Disclosure are all significantlypositive, which is consistent with H1. These results suggest that well-disclosedfirms obtain bank loan contracts with larger amounts because public disclosure canreduce banks’ information search costs (Mazumdar and Sengupta, 2005). We alsofind that firms with more extensive previous relationships with banks and

DisclosureVariables Low High Low-high

Loan_Amount ($millions) 147.78 162.44 �14.66***Loan_Maturity (months) 44.82 54.67 �9.85***Loan_Spread (basis points) 139.80 136.55 3.25*

Notes: Our sample includes 697 bank loan observations originated 2000 to 2005. We includeobservations with lower than the median value of the variable Disclosure in the low subsample andincludes observations with higher than the median value of the variable Disclosure in the highsubsample. We present the mean value of each loan variables in each subsample and the differencebetween these two subsamples. We report the details of definitions of all the variables in Appendix.*,***Significant at the 10 and 1 percent levels, respectively

Table III.Univariate analysis forloan contracting terms

11


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superior country- and firm-level governance obtain bank loan contracting termswith larger amounts. These results indicate that there are incremental effects ofcountry-level and firm-level governance measures – as well as other factors – onbank loan size.

The relationship between firm-level disclosure and the loan size is not onlystatistically significant, but also economically significant based on the results presentedin Column (3). The coefficient of the variable Disclosure is 0.0018. A one standarddeviation increase in the variable Disclosure (21.38) adds to the loan amount by 3.85percent (0.0018 � 21.38), which is approximately $5.93 million (154.13 � 3.85 percent)relative to the mean value of the sample ($154.13 million).

As shown in Table V, the coefficients of the variable Disclosure are all significantlypositive, which is consistent with H1. These results suggest that well-disclosedfirms obtain bank loan contracts with longer maturity. We also find that banks provideloans with longer maturity to firms with superior country-governance, superiorfirm-level governance, lower leverage, and more extensive relationships with banks.These results suggest the incremental effects of country-level and firm-level governancemeasures – as well as other factors – on bank loan maturity.

The relationship between firm-level disclosure and loan maturity is also economicallysignificant based on the results presented in Column (3). The coefficient of the variable

Dependent variable¼ log of Loan_Amount(1) (2) (3)

Disclosure 0.0018*** 0.0013*** 0.0018***(0.0003) (0.0003) (0.0004)

Country_Governance 0.0028*** 0.0024***(0.0004) (0.0005)

Firm_Size 0.0039(0.0037)

Firm_Leverage �0.0541(0.0565)

Firm_Profitability �0.0148(0.0168)

Firm_Tangibility �0.0155(0.0422)

Firm_Governance 0.0043*** 0.0040*** 0.0036***(0.0005) (0.0004) (0.0008)

Prior_Relationship 0.0614*** 0.0587*** 0.0467***(0.0151) (0.0125) (0.0165)

GDP_Growth 0.0028 0.0041 0.0054(0.0049) (0.0041) (0.0058)

Control forLoan_Types Yes Yes YesIndustry effect Yes Yes YesYear effect Yes Yes YesObservations 679 679 326Adjusted R2 0.5027 0.5679 0.5625

Notes: Our sample includes 697 bank loan observations from 2000 to 2005. We report thedetails of definitions of all variables in Appendix. In computing standard errors, we cluster atthe firm level. The table reports coefficients, with standard errors in parentheses. ***Significantat 1 percent level

Table IV.OLS Regressions of logof Loan_Amount onDisclosure and othervariables

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Disclosure is 0.0026. A one standard deviation increase in the variable Disclosure(21.38) adds to loan maturity by 5.56 percent (0.0026 � 21.38), which is approximately2.73 months (49.08 � 17.32 percent) relative to the mean value of the sample(49.08 months).

As shown in Table VI, the coefficients of the variable Disclosure are all significantlynegative, which is consistent with H1. These results suggest that well-disclosedfirms obtain bank loan contracts with lower spread. We also find that banks provideloans with lower spread to firms with higher maturity, a longer previous lendingrelationship, and superior country- and firm-level governance. These results suggestthe incremental effects of country-level and firm-level governance measures – as wellas other factors – on bank loan spread.

The relationship between firm-level disclosure and loan spread is not onlystatistically significant, but also economically significant based on the resultspresented in Column (3). The coefficient of the variable Disclosure is �0.0015.A one standard deviation increase in the variable Disclosure (21.38) reduces the loanspread by 3.21 percent (�0.0015 � 21.38), which is approximately 4.43 basispoints (138.03 � 3.21 percent) relative to the average value of the sample (138.03basis points).

Dependent variable¼ log of Loan_ Maturity(1) (2) (3)

Disclosure 0.0040*** 0.0033*** 0.0026***(0.0005) (0.0005) (0.0006)

Country_Governance 0.0037*** 0.0033***(0.0006) (0.0010)

Firm_Size 0.0041(0.0066)

Firm_Leverage �0.1691***(0.0581)


Firm_Tangibility �0.0335(0.0717)

Firm_Governance 0.0069*** 0.0066*** 0.0080***(0.0006) (0.0006) (0.0011)

Prior_Relationship 0.0728*** 0.0693*** 0.0858***(0.0217) (0.0188) (0.0252)

GDP_Growth �0.0076 �0.0059 0.0112(0.0069) (0.0069) (0.0108)


Notes: Our sample includes 697 bank loan observations from 2000 to 2005. We report thedetails of definitions of all variables in Appendix. In computing standard errors, we cluster atthe firm level. The table reports coefficients, with standard errors in parentheses. ***Significant at1 percent level

Table V.OLS Regressions of

log of Loan_Maturityon Disclosure and

other variables

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To test whether the effects of firm-level disclosure on bank loan contracting terms aremore pronounced for firms with superior governance (H2), we estimate the followingequation:

Bank loan contracting terms ¼aþ b1 Disclosure�Governance variable

þ b2 Disclosure

þ b3 Control variables

þ Industry effects

þ Year effectsþ e

ð2Þ

where bank loan contracting terms include the logarithm of Loan_Amount,Loan_Maturity, and Loan_Spread. The variable Disclosure � Governance variable isour primary interest. The Governance variable can be either Country_Governance orFirm_Governance. The influence of public disclosure is equal to (b1 � Governancevariableþ b2). We expect that b140 if the dependent variable is the logarithmof Loan_Amount or the logarithm of Loan_Maturity. We expect that b1o0 if thedependent variable is the logarithm of Loan_Spread.

Dependent variable¼Log of Loan_Spread(1) (2) (3)

Disclosure �0.0013** �0.0007* �0.0015***(0.0005) (0.0004) (0.0002)

Country_Governance �0.0017*** �0.0016***(0.0004) (0.0005)

Firm_Size �0.0038(0.0033)

Firm_Leverage 0.0314(0.0325)


Firm_Tangibility �0.0822***(0.0200)

Firm_Governance �0.0050*** �0.0051*** �0.0036***(0.0008) (0.0007) (0.0005)

Prior_Relationship �0.0549*** �0.0514*** �0.0481**(0.0117) (0.0089) (0.0172)

GDP_Growth �0.0271** �0.0193** �0.0146(0.0121) (0.0086) (0.0093)


Notes: Our sample includes 697 bank loan observations originated 2000 to 2005. We report the detailsof definitions of all variables in Appendix. In computing standard errors, we cluster at the firm level.The table reports coefficients, with standard errors in parentheses. *,**,***Significant at the 10, 5, and1 percent levels is indicated by levels, respectively

Table VI.OLS Regressions of log ofLoan_Spread onDisclosure and othervariables

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Estimates of Equation (2) with the interaction term between Disclosureand Country_Governance and the interaction term between Disclosure andFirm_Governance are shown in Tables VII and VIII, respectively. The t-statistics arecalculated using standard errors corrected for firm-level clustering. The estimates withthe logarithm of Loan_Amount, the logarithm of Loan_Maturity, and the logarithm ofLoan_Spread as the dependent variable are shown in the three columns, respectively.In Table VII, we do not include firm characteristics[7]. In Table VIII, we control for bothcountry-level variables and firm-level variables.

As shown in Table VII, we find that the coefficients of the interaction term betweenDisclosure and Country_Governance are significantly positive if the dependent variableis the logarithm of Loan_Amount or the logarithm of Loan_Maturity. The effectsof corporate disclosure on the loan amount equal (0.00004 � Country_Governance)and the effects of corporate disclosure on the loan maturity are equal to (�0.00494þ 0.00013 � Country_Governance). The coefficient of the interaction term betweenDisclosure and Country_Governance is significantly negative if the dependent variableis the logarithm of Loan_Spread. The effects of corporate disclosure on the loan spreadare equal to (0.00329�0.00007 � Country_Governance). These results suggest that theeffects of firm-level disclosure on bank loan contracting terms are more pronouncedfor firms located in a country with superior country-level governance, which isconsistent with H2.

As shown in Table VIII, the coefficients of the interaction term between Disclosureand Firm_Governance are significantly positive if the dependent variable is thelogarithm of Loan_Amount or the logarithm of Loan_Maturity. The effects of corporate

Log ofLoan_Amount

Log ofLoan_ Maturity

Log ofLoan_Spread

Dependent variable (1) (2) (3)

Disclosure Country_Governance* 0.00004** 0.00013*** �0.00007***(0.00002) (0.00003) (0.00001)

Disclosure �0.00147 �0.00494** 0.00329***(0.00114) (0.00220) (0.00085)

Country_Governance 0.00034 �0.00362** 0.00293***(0.00095) (0.00169) (0.00083)

Firm_Governance 0.00403*** 0.00663*** �0.00539***(0.00041) (0.00056) (0.00047)

Prior_Relationship 0.05396*** 0.05530*** �0.05094***(0.01223) (0.01666) (0.00827)

GDP_Growth 0.00257 �0.01032 �0.01522**(0.00384) (0.00701) (0.00588)


Notes: Our sample includes 697 bank loan observations from 2000 to 2005. We report the details ofdefinitions of all variables in Appendix. In computing standard errors, we cluster at the firm level.The table reports coefficients, with standard errors in parentheses. *,**,***Significant at the 10, 5, and1 percent levels, respectively

Table VII.Regressions of loan

contracting terms onthe interaction between

Disclosure andCountry_Governance

and other variables

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disclosure on the loan amount equal (0.00008 � Firm_Governance) and the effects ofcorporate disclosure on the loan maturity are equal to (0.00010 � Firm_Governance).The coefficient of the interaction term between Disclosure and Firm_Governanceis significantly negative if the dependent variable is the logarithm of Loan_Spread.The effects of corporate disclosure on the loan spread are equal to (0.00764�0.00017 � Firm_Governance). These results suggest that the effects of firm-leveldisclosure on bank loan contracting terms are more significant for firms with soundfirm-level governance, which is consistent with H2.

5. ConclusionIn this paper, we employ firm-level disclosure rankings across 11 emerging marketsto investigate how firms’ disclosure policies influence bank loan contracting aftercontrolling for firm- and country-level governance mechanisms. We find that firmswith superior disclosure policies obtain bank loans of larger amounts, longer maturity,and lower spread. In addition, the effects of disclosure on bank loan contracting aremore pronounced for firms with superior firm-level non-disclosure governance or firmslocated in countries with better country-level governance.

Log of Loan_Amount Log of Loan_ Maturity Log of Loan_SpreadDependent variable (1) (2) (3)

Disclosure Firm_Governance* 0.00008** 0.00010* �0.00017**(0.00004) (0.00005) (0.00007)

Disclosure �0.00244 �0.00269 0.00764**(0.00193) (0.00281) (0.00363)

Country_Governance 0.00287*** 0.00391*** �0.00169***(0.00058) (0.00096) (0.00043)

Firm_Size 0.00346 0.00364 �0.00627**(0.00323) (0.00593) (0.00262)

Firm_Leverage �0.04993 �0.16398*** 0.09146(0.05273) (0.05861) (0.05564)

Firm_Profitability �0.01588 �0.03843 �0.01322(0.01645) (0.03396) (0.01332)

Firm_Tangibility �0.03266 �0.05471 �0.07345***(0.04076) (0.06840) (0.01539)

Firm_Governance �0.00143 0.00186 0.00707(0.00240) (0.00342) (0.00445)

Prior_Relationship 0.05357*** 0.09425*** �0.05116***(0.01831) (0.02785) (0.01703)

GDP_Growth 0.00392 0.00938 �0.01332(0.00579) (0.01022) (0.00931)


Notes: Our sample includes 697 bank loan observations from 2000 to 2005. We report the details ofdefinitions of all variables in Appendix. In computing standard errors, we cluster at the firm level.The table reports coefficients, with standard errors in parentheses. *,**,***Significant at the 10, 5, and1 percent levels, respectively

Table VIII.Regressions of loancontracting terms onthe interaction betweenDisclosure andFirm_Governance andother variables

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Our findings suggest that banks in emerging countries still depend on informationprovided by public disclosure, although they can collect some private information fromborrowers. In addition, superior country-level governance and firm-level non-disclosuregovernance may prevent borrowers from withholding useful information or disclosingfalse information, and banks may better reward information disclosed by well-governedborrowers by providing more favorable loan contracting terms.

Our evidence has some clear policy implications. According to our findings, one ofthe ways for firms to obtain low cost financing is to increase their disclosure level.This works better if firms have superior firm-level governance or if firms are located incountries with superior country-level governance.

Notes

1. Mazumdar and Sengupta (2005) find that US firms with superior disclosure policies paylower interest rates on private debt.

2. The results are available upon request.

3. Detailed surveys about the relationship between corporate governance and disclosure can befound in Bushman and Smith (2001) and Armstrong et al. (2010).

4. The details of questions in each category of CLSA data can be found in Klapper and Love(2004). We do not include questions in the social awareness to construct our governancevariables. Our results are still robust if we include it in our governance variables.

5. We do not include other aspects of bank loan contracts such as covenants because most ofthese data are missing for our sample firms.

6. Our results are still robust when we change our sample period by including only loans from2000 to 2004 or loans from 2000 to 2006.

7. Our sample is reduced from 679 observations to 326 observations after controlling for firmcharacteristics as shown in Tables 4 and 5. Our sample is reduced from 90 observations to67 observations after controlling for firm characteristics as shown in Table VI. This alsomeans that we will lose some countries in our sample. Because we only have 11 countriesin our sample, the variation of the variable Country_Governance would be reducedsignificantly after we lose countries in our sample as a result of controlling for firmcharacteristics. Thus, we do not include firm characteristics in Table VII.

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Appendix

Corresponding authorAssistant Professor Liang Song can be contacted at: [email protected]

Variable Description

Firm-level variablesDisclosure The score of the transparency category in the CLSA surveyFirm_Governance The average value of the scores of the five categories, including

management discipline, independence, accountability, responsibility,and fairness in the CLSA survey

Firm_Size The logarithm of a firm’s total assetsFirm_Leverage Total debt divided by total assetsFirm_Profitability Net income divided by total assetsFirm_Tangibility Property plant and equipment divided by total assetsPrior_Relationship The logarithm of the sum between 1 and the number of previous loans

by firmsCountry-level variablesCountry_Governace The world governance indexGDP_Growth The percent change in a country’s GDP per capita relative to the previous

yearVariables related to loanLoan_Amount The amount of loan (measured in millions of dollars)Loan_Maturity The loan maturity (measured in months)Loan_Spread The all-in spread drawn (measured in basis points)Loan_Types The dummy variables, which is equal to one if a loan is a term loan,

revolver more than one year, 364-day facility, or revolver less than 1 year

Table AI.Descriptions of

the variables

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Public disclosure and bank loan contracting: evidence from emerging markets