Previous studies document that firms in countries speaking languages with strong future time reference (FTR), which more sharply dissociates the future from the present, engage in less future-oriented corporate behaviors relating to their default and information risks. We find that strong FTR influences creditors’ pricing of bank loan contracts: banks design more unfavorable loan terms to strong-FTR borrowers, including larger loan spread, higher likelihood of collateral requirement, and more covenants. This effect can be mitigated by a country’s strong governance. We confirm that strong FTR is associated with higher default and information risks of borrowing firms. Overall, our findings suggest that language represents a distinctive risk to banks which is priced in the loan market.
Bibliographical noteFunding Information:
We thank Yue Ma (editor), and an anonymous reviewer for their many insightful and constructive suggestions. We also thank Jeong-Bon Kim, and Byron Yang Song for valuable comments. The authors acknowledge research support from Minnan Normal University, Hong Kong Polytechnic University, and Lingnan University. All errors are our own.
© 2021 City University of Hong Kong and National Taiwan University.
- bank loan contracting
- future time reference
- strong FTR