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How Law and Institutions Shape Financial Contracts: The Case of Bank Loans

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  • Jun Qian
  • Philip E. Strahan
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    Abstract

    We examine empirically how legal origin, creditor rights, property rights, legal formalism, and financial development affect the design of price and non-price terms of bank loans in almost 60 countries. Our results support the law and finance view that private contracts reflect differences in legal protection of creditors and the enforcement of contracts. Loans made to borrowers in countries where creditors can seize collateral in case of default are more likely to be secured, have longer maturity, and have lower interest rates. We also find evidence, however, that ?Coasian? bargaining can partially offset weak legal or institutional arrangements. For example, lenders mitigate risks associated with weak property rights and government corruption by securing loans with collateral and shortening maturity. Our results also suggest that the choice of loan ownership structure affects loan contract terms.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11052.

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    Date of creation: Jan 2005
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    Publication status: published as Qian, Jun and Philip Strahan. "HOW LAWS AND INSTITUTIONS SHAPE FINANCIAL CONTRACTS: THE CASE OF BANK LOANS." Journal of Finance 62, 6 (2007): 2803-34.
    Handle: RePEc:nbr:nberwo:11052

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    Cited by:
    1. Raghuram G. Rajan, 2006. "Has Finance Made the World Riskier?," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 12(4), pages 499-533.
    2. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(11), pages 2945-2966, November.
    3. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
    4. Fotios Pasiouras, 2008. "International evidence on the impact of regulations and supervision on banks’ technical efficiency: an application of two-stage data envelopment analysis," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 30(2), pages 187-223, February.
    5. Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.
    6. Berger, Allen N. & Udell, Gregory F., 2005. "A more complete conceptual framework for financing of small and medium enterprises," Policy Research Working Paper Series 3795, The World Bank.
    7. Hainz, Christa & Kleimeier, Stefanie, 2006. "Project Finance as a Risk-Management Tool in International Syndicated Lending," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 183, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Rainer Haselmann & Katharina Pistor & Vikrant Vig, 2010. "How Law Affects Lending," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(2), pages 549-580, February.
    9. Doris Neuberger & Maurice Pedergnana & Solvig Räthke-Döppner, 2008. "Concentration of Banking Relationships in Switzerland: The Result of Firm Structure or Banking Market Structure?," Journal of Financial Services Research, Springer, Springer, vol. 33(2), pages 101-126, April.
    10. Safavian, Mehnaz & Sharma, Siddharth, 2007. "When do creditor rights work?," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 484-508, September.
    11. World Bank, 2009. "Banking the Poor : Measuring Banking Access in 54 Economies," World Bank Publications, The World Bank, number 13804, August.
    12. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2006. "The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 27(4), pages 403-438, December.
    13. Joshua Charap & Jelena Pavlovic, 2009. "Development of the Commercial Banking System in Afghanistan," IMF Working Papers 09/150, International Monetary Fund.
    14. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(1), pages 113-130, January.
    15. Safavian, Mehnaz & Sharma, Siddharth, 2007. "When do creditor rights work?," Policy Research Working Paper Series 4296, The World Bank.
    16. Bosch, Oliver & Steffen, Sascha, 2011. "On syndicate composition, corporate structure and the certification effect of credit ratings," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 290-299, February.
    17. Berger , Allen N & Hasan , Iftekhar & Zhou, Mingming, 2007. "Bank ownership and efficiency in China: what lies ahead in the world’s largest nation?," Research Discussion Papers, Bank of Finland 16/2007, Bank of Finland.
    18. Doris Neuberger & Solvig Räthke, 2009. "Microenterprises and multiple bank relationships: The case of professionals," Small Business Economics, Springer, Springer, vol. 32(2), pages 207-229, February.
    19. Neuberger, Doris & Räthke, Solvig, 2006. "Microenterprises and multiple bank relationships: Evidence from a survey among professionals," Thuenen-Series of Applied Economic Theory 61, University of Rostock, Institute of Economics.
    20. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.

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