Do Trade and Capital Flows Complement Each Other? Evidence from the US Syndicated Loan Market

Abstract

We empirically test the hypothesis that trade flows and debt flows complement each other as argued by Rajan and Zingales (2003). Using a dataset of loans made to U.S. borrowers, we find that the probability of a foreign bank participation in a loan increases as the bilateral trade between the US and the lender’s country increases. We also find that as a foreign country imports more from the U.S. in the borrowing firm’s industry, the probability of a bank from that country participating in the loan increases. On the contrary, an increase in exports by a foreign country to U.S. decreases the probability of a bank from that country participating in the loan.

Keywords: trade flows, capital flows, syndicated loans, foreign banks

JEL Classification: F14, F34