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

TLDR

Legal and institutional differences shape the ownership and terms of bank loans worldwide. The study aims to provide a more comprehensive view of how financial contracts respond to legal and institutional environments. The authors employ a multidimensional empirical model to analyze these effects. Strong creditor protection results in more concentrated ownership, longer maturities, and lower rates, with the impact varying by borrower size and asset tangibility, and foreign banks’ ownership falling relative to domestic banks as protection weakens.

Abstract

ABSTRACT Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.