Lenders’ Culture and the Pricing of US Public Corruption in Corporate Loans

Abstract

We investigate how the cultural heritage of the CEOs of banks acting as lead lenders in the US syndicated loan market shapes the relationship between public corruption and the cost of bank loans. We find strong evidence that banks led by CEOs originating from higher uncertainty avoidance societies penalize less sharply, in terms of the cost of bank loans, the presence of high local public corruption in the state of the borrowing firms. We find some similar evidence for banks led by CEOs that trace their origins to more individualistic societies. These results are robust to several tests that address concerns such as the matching between borrowing firms from states with high corruption and the cultural heritage of bank CEOs, omitted variable issues, endogeneity, and after controlling for several CEO and bank characteristics. These findings are consistent with the view that certain cultural heritage traits prompt tolerance for the risks of corruption and show that the pricing of institutional quality in corporate loans is conditional on banks led by CEOs with such traits.

Keywords: CEOs, cultural heritage, public corruption, cost of bank loans

JEL Classification: G21, Z13, D73