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

Listed author(s):
  • Jun Qian
  • Philip E. Strahan
Registered author(s):

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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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
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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