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Internal governance, legal institutions and bank loan contracting around the world

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  • Ge, Wenxia
  • Kim, Jeong-Bon
  • Song, Byron Y.
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    Abstract

    Using a sample of non-U.S. firms from 22 countries during 2003–2007, we examine the effect of firm-level governance on various features of loan contracting in the international loan market. We find that banks charge lower loan rates, offer larger and longer-maturity loans, and impose fewer restrictive covenants to better-governed firms. We also find that the favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions than in countries with weak legal institutions. Our results suggest that banks view a borrower's internal governance as a factor that mitigates agency and information risk, and that country-level legal institutions and firm-level governance mechanisms complement each other in influencing loan contracting terms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 18 (2012)
    Issue (Month): 3 ()
    Pages: 413-432

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    Handle: RePEc:eee:corfin:v:18:y:2012:i:3:p:413-432

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    Web page: http://www.elsevier.com/locate/jcorpfin

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    Keywords: Corporate governance; Legal origin; Legal enforcement; Loan contracting;

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    Cited by:
    1. Xiao, Gang, 2013. "Legal shareholder protection and corporate R&D investment," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 240-266.

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