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Banking Relationships And Creditor Rights

Author

Listed:
  • Vidhan K. Goyal

    (Hong Kong University of Science and Technology)

  • S. Lakshmi Naaraayanan

    (Hong Kong University of Science and Technology)

  • Anand Srinivasan

    (National University of Singapore)

Abstract

Do the legal rights of creditors influence whether firms borrow from arm’s length or relationship lenders in a country? We examine this question by exploiting the staggered adoption of legal reforms that changed creditor rights. We find that as creditor rights strengthen, firms exhibit a greater propensity to switch to relationship lenders. Conversely, firms switch to arm’s length lenders as creditors rights weaken. These results are consistent with the view that arm’s length creditors have a bias towards excessive liquidation in environments with strong creditor rights. Hence as creditor rights strengthen, firms switch to relationship lenders as they are less likely to sub-optimally liquidate the firm when continuation is more efficient.

Suggested Citation

  • Vidhan K. Goyal & S. Lakshmi Naaraayanan & Anand Srinivasan, 2019. "Banking Relationships And Creditor Rights," Working Papers 022301, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022301
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/1016201910055PMCRLendingGNS.pdf
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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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