Does trust matter for the cost of bank loans?

This paper extends the literature related to the role of trust on economic activity, focusing on the influence of trust on lender-borrower relationships and analysing its effect on the interest rate spread for a sample of 20,699 loans from 47 countries over the period 2003–2018. We consider not just...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Vol. 66; p. 101791
Main Authors: Álvarez-Botas, Celia, González, Víctor M.
Format: Journal Article
Language:English
Published: Elsevier B.V 01.02.2021
Subjects:
Bank loan spread
Economic development
Legal enforcement
Trust
Bank loan spread
Trust
Economic development
Legal enforcement
ISSN:0929-1199, 1872-6313
Online Access:Get full text
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Summary:This paper extends the literature related to the role of trust on economic activity, focusing on the influence of trust on lender-borrower relationships and analysing its effect on the interest rate spread for a sample of 20,699 loans from 47 countries over the period 2003–2018. We consider not just the role of trust, but also how its effect is moderated by the country's legal enforcement and degree of economic development. The results show that trust has no effect on loan spreads. However, trust is found to reduce loan spreads when a country's formal institutions are weak, in line with the existence of a substitutive effect between formal and informal institutions in reducing interest rates. As regards the degree of economic development, our results show that both trust and legal enforcement have a greater influence on the interest rate spread of bank loans in countries with a lower level of economic development. •There is a substitutive effect between formal and informal institutions in reducing interest rates.•Trust is found to reduce loan spreads when a country's formal institutions are weak.•Trust has a greater influence on the spread of bank loans in countries with a lower level of economic development.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2020.101791