Uncertainty and loan pricing for public and private firms: evidence from the Brexit referendum

We examine the impact of uncertainty on loan pricing for public and private firms in the UK, using the 2016 Brexit referendum as an exogenous shock of uncertainty. We find that uncertainty leads to a significantly higher cost of borrowing for private firms relative to public firms. However, firm-level foreign exposure, i.e. foreign sales and subsidiaries in the foreign markets, mitigates the adverse impact of uncertainty on loan prices more for private firms than public firms. Moreover, uncertainty increases the number of financial covenants in loans for public firms with high information transparency (i.e. constituents of FTSE 100/250). However, we observe a decline in the number of financial covenants in loans for private firms with low information transparency (i.e. private firms without institutional investors) under uncertainty. Overall, we provide novel evidence highlighting the differences in the design of syndicated loan contracts between public and private firms under uncertainty.