Wen He and Maggie (Rong) Hu, senior lecturers at the University of New South Wales Business School in Australia, examine whether religion affects the terms of bank loans.
In the paper’s abstract, they write, “We hypothesize that lenders value the traits of religious adherents, such as risk aversion, ethical behavior and honesty, and thus offer favorable loan terms to religious borrowers. Consistent with this hypothesis, we find that corporate borrowers located in counties with a high level of religiosity are charged lower interest rates, have larger loan amounts and fewer loan covenants. These results suggest that the corporate culture of borrowers influences the availability and cost of bank loans.”
According to the introduction, the “study aims to extend this stream of research by investigating whether the market understands and values corporate behavior that is driven by religions. In particular, we study if one important group of stakeholders, namely bank lenders, appreciates and rewards the conservative and ethical behavior of firms located in more religious areas.”
“This study is important for two reasons. First, rational economic agents would expect good corporate behavior to be rewarded by the market, which provides incentives for them to behave ethically. Finding evidence that the markets reward good corporate behavior related to religious social norms would provide economic support to prior studies in social finance and religions. Second, bank loans have become the predominant source of external financing for U.S. companies. In 2007, for example, large U.S. corporations raised a record $2,282 billion new capital from the syndicated loan market, compared with $168 billion from the equity market. Levine and Zervos (1998) find that bank loans are strongly and positively related to economic growth across countries. It is thus important to understand how banks make lending decisions and whether nonfinancial information, such as religious social norms, affects the terms of loan contracts.”
