Firm Trustworthiness and Bank Loan Pricing

Using a novel dataset of firm-level perceived trustworthiness from the news media and social media, we find that lending banks charge significantly higher loan spread on firms with lower trustworthiness. Loans to these firms also tend to have shorter loan maturities, more financial covenants, and higher likelihoods of requiring collateral. We further use the Regulation SHO Pilot program as an exogenous variation and find that the effects of trustworthiness are reduced when pilot firms are better disciplined by short sellers. That is, banks have relied less on soft information like trustworthiness when the overall information and governance environments regarding the borrowing firms are improved. Last, firm trustworthiness effects are stronger for firms with high corruption culture, weak corporate governance, and higher information asymmetry. Collectively, our results suggest that perceived firm trustworthiness from the stakeholders conveys valuable credit quality information to bank loan lenders.