Bank Loan Contracting and Corporate Diversification: Does Organizational Structure Matter to Lenders?

61 Pages Posted: 12 Jun 2010 Last revised: 13 Nov 2019

See all articles by Varouj A. Aivazian

Varouj A. Aivazian

University of Toronto - Rotman School of Management

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Mohammad M. Rahaman

Saint Mary's University - Sobey School of Business

Date Written: December 9, 2011

Abstract

This paper investigates the effect of a firm's organizational structure on its debt financing activities. Using corporate diversification strategy as an identification tool for organizational structure, we find that diversified firms have significantly lower loan rates than comparable focused firms, and we find no evidence that diversified firms are subject to more restrictive non-price contract terms pertaining to maturity, collateral requirements, and covenant restrictions. We show that the effect of diversification on the cost of a bank loan is channeled primarily through coinsurance in investment opportunities and cash flows and that the effect is nonlinear: as the extent of corporate diversification grows, the cost-reduction benefit of diversification decreases. Our results indicate that the organizational structure of the firm can alleviate its external financing constraints and that it has an important bearing on the firm's financing capacity.

Keywords: Organization structure, Debt capacity, Corporate diversification, Bank loan, Financial contracting, Cost of debt

JEL Classification: G21, G30, G32, L25

Suggested Citation

Aivazian, Varouj A. and Qiu, Jiaping and Rahaman, Mohammad M., Bank Loan Contracting and Corporate Diversification: Does Organizational Structure Matter to Lenders? (December 9, 2011). Journal of Financial Intermediation, Vol. 24, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=1623427 or http://dx.doi.org/10.2139/ssrn.1623427

Varouj A. Aivazian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Department of Economics
Toronto, Ontario M5S 3E6
Canada
416-978-2375 (Phone)
416-978-5433 (Fax)

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Mohammad M. Rahaman (Contact Author)

Saint Mary's University - Sobey School of Business ( email )

Halifax, Nova Scotia B3H 3C3
Canada

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