Firm Prestige and the Cost of Bank Loans

Abstract

Firm prestige reduces the cost of bank loans. Specifically, when borrowers are included in Fortune’s list of “America’s Most Admired Companies” (MAC), their loan costs decline by approximately 13 bps or US$5.122 million, on average. The effect appears causal. The negative relation between prestige and loan costs is more pronounced for borrowers in more competitive industries and with higher information uncertainty. Banks with low information gathering capacity offer favorable loan terms to the MAC ranked borrowers when they face a high degree of competition from other banks. The MAC ranking appears to be used by these banks as a summary statistic for loan quality in the face of competition.