Common use of Control Variables Clause in Contracts

Control Variables. This section provides the empirical results of the determinants of the loan rate. We analyze the determinants of the loan rate by regressing the loan interest rate on our distance, relationship, competition, and control variables, which include loan contract characteristics, loan purpose, firm characteristics, and interest rates. We use the ordinary least squares estimation technique. To benchmark our empirical model, we first analyze and discuss a specification containing only the relationship and control variables. Afterwards, we add our competition and distance variables of interest,45 discuss and interpret the competition and distance results, and perform supplementary robustness tests. First, we regress the loan interest rate (in basis points) on the relationship characteristics and control variables.46 Most control coefficients remain virtually unaltered throughout the exercises in this paper. We therefore tabulate the estimated coefficients only once, in Table 6. The loan contract characteristics include whether the loan is collateralized, its repayment duration, and the loan revisability options. The coefficient of Collateral indicates that when a loan is collateralized, the loan rate decreases by approximately 51 basis points. This result is in line with the sorting-by-private-information paradigm, which predicts that safer borrowers pledge more collateral (e.g., ▇▇▇▇▇▇ and ▇▇▇▇▇ (1990) and ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ (1987)). However, it contrasts with results by ▇▇▇▇▇ and ▇▇▇▇▇▇▇ (1998) and ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇ (1998), who report a positive (though economically small) effect of collateralization on loan rates. The coefficient of ln(1+Repayment Duration of Loan) is significantly negative at a 1% level: an increase in duration from say five to six years reduces the loan rate by 14 basis points. However, ▇▇▇▇▇▇ (1991) finds that an increase in duration from five to six years increases bond yield spreads by around 11 basis points. But the 72 corporate bonds in his sample have maturities longer than seven years, while 88% of our 15,044 sample bank loans have maturities shorter than seven years.47 To replicate his empirical model, we replace ln(1+Repayment Duration of Loan) by a linear and quadratic term in Repayment Duration, and restrict the coefficient on the Government Security variable to be equal to one. Sampling only loans with maturities longer than seven years, we also find that an increase in duration increases bond yield spreads, although the effect is smaller (i.e., only 3 basis points going from five to six years). The estimated coefficients on the Repayment Duration variables for the full sample including all maturities suggest that repayment duration negatively affects spreads for loans with maturities shorter than eight years.