The spillover effect of private firm disclosure on public firms’ loan pricing

Abstract We examine whether private firm disclosure affects the price that public firms pay for their bank loans. Using global data on syndicated loans, we find that private firm disclosure significantly reduces public firms’ loan spreads. This finding supports a positive information externalities view whereby private firm disclosure helps banks evaluate public borrowers’ credit risk within the industry context and reduces information asymmetry between banks and borrowers. Consistent with this mechanism, we find larger reductions in public firms’ loan spreads when banks have less information about the borrower or lower expected monitoring intensity, when public-firm borrowers are more informationally opaque, when private firms have greater economic importance in the industry, when private and public firms are more economically similar, or when a larger share of private firms in an industry have audited financial statements. We show that private firm disclosure generates positive externalities for the loan market by reducing information asymmetry.