Does local economic freedom matter for the cost of corporate borrowing from the banking sector? Evidence from the US states

Using data on large loans to US firms, we show that higher economic freedom in borrowers' headquarters states reduces the cost of bank credit. A one standard deviation increase in economic freedom lowers loan spreads by 12.38 basis points ($1.5 million interest savings for the average loan). We also provide evidence supporting the economic mechanism by which lenders view economic freedom as enhancing borrowers' ability to capitalize on investment and growth opportunities. The main drivers of this effect are freedom from government spending and taxation, while labor market freedom particularly benefits smaller firms and those in high economic growth potential states. Furthermore, higher economic freedom is linked to longer loan maturities, reduced fees, and looser general covenants