Abstract

http://ssrn.com/abstract=2177425
 


 



What Determines the Design of Bank Loan Contracts? A New Channel


Tolga Caskurlu


University of Illinois at Urbana-Champaign - Department of Finance

November 19, 2012


Abstract:     
I investigate whether uncertainties in bankruptcy procedures shape fi nancial contracting in the U.S. syndicated loan market. Utilizing a novel hand-collected data set, I exploit the application of substantive consolidation procedure, which is probably the most debated issue in U.S. bankruptcy courts. This procedure has two unique features: i) banks have unexpectedly large losses on their unsecured loans since in the court rooms the existing seniorities are removed, resulting in billion dollar allocation changes between the creditor groups; ii) since there is no specifi c provision in the U.S. Code, there is consensus in the law literature that this procedure has no theoretical background and its application is highly unpredictable. I conclude that after exposure, banks write more secured credit and tighter covenants in their new loans to other firms, even after controlling for bank capitalization, borrower and time fixed e ffects. To my knowledge, this is the fi rst paper to show that uncertainties in the bankruptcy procedures provide an important friction in the loan market. Moreover, my work complements the previous literature by providing a new channel for the determinants of optimal financial contracts. Results of this paper are also important for policy makers, who want to ease bank lending standards.

Keywords: contract strictness, collateral, bank lending, bankruptcy

JEL Classification: G21, G32, G33

working papers series


Not Available For Download

Date posted: November 21, 2012 ; Last revised: November 24, 2012

Suggested Citation

Caskurlu, Tolga, What Determines the Design of Bank Loan Contracts? A New Channel (November 19, 2012). Available at SSRN: http://ssrn.com/abstract=2177425 or http://dx.doi.org/10.2139/ssrn.2177425

Contact Information

Tolga Caskurlu (Contact Author)
University of Illinois at Urbana-Champaign - Department of Finance ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
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