Geographic Proximity, Information Asymmetry and Loan Pricing in Internal Capital Markets
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| Title | Geographic Proximity, Information Asymmetry and Loan Pricing in Internal Capital Markets
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| Author | Qian Xuesong,Jin Fangji and Du Li |
| Organization | Huazhong University of Science and Technology |
| Email | qianxuesong2008@163.com；linxiao_lizzy@hust.edu.cn；duli900506@hotmail.com |
| Key Words | Geographic Proximity; Intra-group Loans; Internal Capital Markets; Loan Pricing; Information Asymmetry |
| Abstract | It is widely confirmed that geographical distance has important influences on arm’s-length transactions, however, much less is known about the role of geographical distance within firms. Using a manual-collected sample of entrusted loans announced by listed companies in China, this paper empirically examines the impact of geographic proximity on loan pricing in internal capital markets. We find that loan prices are increasing with the distance between borrowers and lenders, and for 1% increase in distance, the loan rate will increase by 0.065 on average. Consistent with the notion that a reduction in distance makes it easier for lenders to monitor borrowers and gather soft information, we find that our results are stronger: i) for lenders whose headquarters are more time constrained; ii) during the earlier years of our sample period, when internet and transportation infrastructure were less developed; iii) for borrowers where information uncertainty is greater and soft information is more valuable. This paper indicates that information asymmetry caused by distance exerts negative effects on economic activities within firms, then the development of information network and transportation infrastructure will decrease loan rates within firms by facilitating monitoring and access to information. |
| Serial Number | WP1060 |
| Time | 2016-05-10 |
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