Bad Apples and Loan Pricing
in Affected Industries: Evidence from a Corporate Fundraising Scandal
Tri Vi Dang
Lecturer in Economics, Columbia University
When some firms misbehave,
how do banks respond and do bad apples adversely affect their peer group? We
use a corporate fundraising scandal in Anyang, China as a natural experiment
and document that observed loan pricing is consistent with a theory of
collateralized lending and costly screening. Banks increase both interest rates
and collateral requirements as well as shorten the maturities of loans for
firms in affected industries and with higher industry scandal index. The averse
spillover effects of bad apples are mitigated when banks have more soft information about borrowers measured by closer geographic distance.
The fundraising scandal lasts for five quarters and thereafter bank loans characteristics
revert to the pre-scandal level. This scandal has real effects on
non-misbehaving firms' performances.