Effects of Foreign Institutional Ownership on Foreign Bank Lending: Evidence from South America

Abstract

Using data from five South American countries from 2001 to 2008, this paper examines how foreign ownership affects the loan cost of borrowers. We find that the cost of debt financing is significantly higher for firms whose largest shareholder is a foreign institutional one. The results suggest that due to potential agency conflicts between shareholders and creditors, having block institutional shareholders tend to increase the borrowers’ debt burden. We also find that for firms with better information transparency and countries with stronger creditor right protection and less exposure to financial crises, the effects of foreign institutional ownership on costs of bank loans appear to be weaker. More interestingly, our results indicate that for firms whose largest foreign shareholder is from the same country as its lead bank, the effects of foreign institutional shareholders on loan prices become smaller, suggesting milder conflicts between the same-base-county pair of shareholders and creditors. Our findings supplement the existing literature on linkages between corporate ownership structure and cost of capital.

Keywords: foreign ownership, foreign institutional shareholder, foreign bank, South America

JEL Classification: G20, G32