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

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  • JUN QIAN
  • PHILIP E. STRAHAN

Abstract

Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.

Suggested Citation

  • Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:6:p:2803-2834
    DOI: 10.1111/j.1540-6261.2007.01293.x
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    JEL classification:

    • K0 - Law and Economics - - General
    • G2 - Financial Economics - - Financial Institutions and Services
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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