IDEAS home Printed from https://ideas.repec.org/a/ucp/jlawec/doi10.1086-708735.html
   My bibliography  Save this article

Litigation Risk and Debt Contracting: Evidence from a Natural Experiment

Author

Listed:
  • Zhihong Chen
  • Ningzhong Li
  • Jianghua Shen

Abstract

In June 2001, Nevada changed its state corporate law by substantially reducing the legal liability of directors and officers for breaching fiduciary duties owed to the corporation. We examine the impact of the reduced litigation risk caused by this legislative change on Nevada-incorporated firms’ loan contract terms and related borrower-lender agency conflicts. Using a difference-in-differences analysis, we find that the legislative change led to less favorable loan contract terms for Nevada-incorporated firms: higher spread and more restrictive covenants. In addition, after the legislative change, Nevada-incorporated firms with severe borrower-lender agency conflicts took more risk, increased payout through stock repurchase, and reduced capital investment and equity issuance. Collectively, these results suggest that the reduced litigation risk exacerbates the borrower-lender agency conflicts.

Suggested Citation

  • Zhihong Chen & Ningzhong Li & Jianghua Shen, 2020. "Litigation Risk and Debt Contracting: Evidence from a Natural Experiment," Journal of Law and Economics, University of Chicago Press, vol. 63(4), pages 595-630.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/708735
    DOI: 10.1086/708735
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/708735
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/708735
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/708735?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sandvik, Jason, 2020. "Board monitoring, director connections, and credit quality☆," Journal of Corporate Finance, Elsevier, vol. 65(C).
    2. Maren Forier & Nadine Lybaert & Maarten Corten & Niels Appermont & Tensie Steijvers, 2023. "The flip side of the coin: how entrepreneurship-oriented insolvency laws can complicate access to debt financing for growth firms," European Journal of Law and Economics, Springer, vol. 56(3), pages 461-495, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlawec:doi:10.1086/708735. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JLE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.