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Asset Specificity, Industry-Driven Recovery Risk, and Loan Pricing

Published online by Cambridge University Press:  13 March 2014

Christopher James  and
Atay Kizilaslan
Christopher James
Affiliation:
[email protected], Warrington College of Business, University of Florida, PO Box 117168, Gainesville, FL 32611 and Federal Reserve Bank of San Francisco
Atay Kizilaslan
Affiliation:
[email protected], Cornerstone Research, 599 Lexington Ave, New York, NY 10022.
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Abstract

This paper examines the relationship between a firm’s exposure to industry downturns that we call industry risk and bank loan pricing. We measure industry risk based on the relationship between a firm’s stock returns and industry returns conditional on an industry downturn. We find industry risk is significantly related to the recovery rates in bankruptcy and the likelihood of the firm experiencing financial distress when its peers are also in distress. More importantly, we find that the spreads on unsecured bank loans are positively related to industry risk measures. These relationships are stronger for firms with more industry-specific assets.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014 , pp. 599 - 631
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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