Essay How Lenders Follow The Herd

710 Words Jan 3rd, 2016 3 Pages
• Lenders follow the herd: Two consistent findings emerged from the bank-spread analyses: First, firms with more environmental concerns were linked with smaller loan syndicate sizes (a syndicate is made up of several banks that pool together to fund firms for specific projects, requests for debt financing, etc.). This implies a higher number of lending institutions will refuse to participate in the financing of a company they deem to be environmentally risky. Second, those firms with a number of environmental concerns who still received bank financing had a higher ICC via increased cost of debt; this is consistent with the notion that banks demand higher loan spreads in order to hedge reputation and litigation risk.
Companies involved in risky environmental operations must be acutely aware of all market players, and not concern themselves solely with shareholder interest. Debt financing is an important part of the borrowing firm’s capital structure, and often a critical player in project financing.
The final takeaways from the case study are that lenders will reward for certain behaviours while investors generally do not, but both lenders and investors punish for bad behaviours by divesting or charging higher return rates, all of which threatens the delicate ratio between debt and equity cost of capital. Because while the effects of market players’ behaviour may not initially seem so grave, they have can have serious impacts on next quarters’ balance sheet.

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