What is it about?
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.
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Why is it important?
Specifically, our paper addresses various research questions: (1) Do borrowers obtain bank loans at lower interest rates in high trust societies?; (2) Is this reduction in interest rates of bank loans higher in countries with weak formal institutions?; and (3) Is the influence of trust on the interest rate spread of bank loans higher in less economically developed countries?
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This page is a summary of: Does trust matter for the cost of bank loans?, Journal of Corporate Finance, February 2021, Elsevier, DOI: 10.1016/j.jcorpfin.2020.101791.
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