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Creditor control rights and borrower protection: the role of borrower consent clause in private debt contracts

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  • Saiying Deng

    (Kent State University)

  • Yutao Li

    (University of Lethbridge)

Abstract

We investigate how borrower consent clause (BCC) is used in private debt contracts as a contract design mechanism to protect borrower interests. We find that the probability of including a BCC in debt contracts increases in the intensity of creditor control rights measured by number of financial covenants. Furthermore, we document that performance covenants result in higher likelihood of BCC inclusion than capital covenants do. For robustness checks, we use alternative proxies for creditor control rights, and employ simultaneous equation and propensity score matching to address endogeneity. The baseline results still hold. Exploiting Anti-Recharacterization Law (ARL) as a quasi-natural experiment for strengthened creditor rights, we find that adoption of ARL increases the likelihood of BCC inclusion. Using credit default swap (CDS) trading as a setting of weakened creditor control rights, we document the inception of CDS trading is associated with lower likelihood of including BCC. Furthermore, we find that the association between creditor control rights and BCC is more pronounced for borrowing firms with good quality and more conservative financial reporting.

Suggested Citation

  • Saiying Deng & Yutao Li, 2023. "Creditor control rights and borrower protection: the role of borrower consent clause in private debt contracts," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 357-394, July.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:1:d:10.1007_s11156-023-01151-6
    DOI: 10.1007/s11156-023-01151-6
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    More about this item

    Keywords

    Borrower consent clause; Creditor control rights; Loan assignment; Incomplete contracting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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