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

  • Jun Qian
  • Philip E. Strahan
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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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File URL: http://www.nber.org/papers/w11052.pdf
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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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  1. Philip E. Strahan, 1999. "Borrower risk and the price and nonprice terms of bank loans," Staff Reports 90, Federal Reserve Bank of New York.
  2. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
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  4. Jappelli, Tullio & Pagano, Marco, 1999. "Information Sharing, Lending and Defaults: Cross-Country Evidence," CEPR Discussion Papers 2184, C.E.P.R. Discussion Papers.
  5. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
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  7. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
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  12. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," NBER Working Papers 8460, National Bureau of Economic Research, Inc.
  13. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  14. Giannetti, M., 2000. "Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices," Papers 376, Banca Italia - Servizio di Studi.
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  18. Rossi, Stefano & Volpin, Paolo, 2003. "Cross-Country Determinants of Mergers and Acquisitions," CEPR Discussion Papers 3889, C.E.P.R. Discussion Papers.
  19. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
  20. Esty, Benjamin C. & Megginson, William L., 2003. "Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 37-60, March.
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  30. repec:ner:tilbur:urn:nbn:nl:ui:12-3125510 is not listed on IDEAS
  31. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  32. Magda Bianco & Tullio Jappelli & Marco Pagano, 2001. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," CSEF Working Papers 58, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Apr 2002.
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  35. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
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