Abstract

http://ssrn.com/abstract=2283176
 
 

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State Contract Law and Debt Contracting


Colleen Honigsberg


Columbia University - Columbia Business School

Sharon P. Katz


Columbia Business School - Accounting, Business Law & Taxation

Gil Sadka


Columbia Business School - Accounting, Business Law & Taxation

September 30, 2013

Columbia Business School Research Paper No. 13-47

Abstract:     
We examine the relation between debt contracting and state contract law. We find that when the contract is governed by law that is favorable to lenders (pro-lender law), there are significantly fewer covenant violations than when the contract is governed by law that is favorable to debtors (pro-debtor law). We also find that the costs of covenant violations are complementary with the governing law. When a contract is governed by pro-debtor law, the costs of covenant violations – such as reductions in net debt issuance, acquisitions, capital expenditures, and physical property, as well as increases in the number of covenants – either do not occur or occur in much smaller magnitude. Finally, we compare contract terms and firm characteristics by state of contracting. The data suggest that firms opt into the governing law that is best suited for their needs, providing support for the legal argument that there is a market for contracts similar to the market for incorporations.

Number of Pages in PDF File: 63

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Date posted: June 23, 2013 ; Last revised: October 22, 2013

Suggested Citation

Honigsberg , Colleen and Katz, Sharon P. and Sadka, Gil, State Contract Law and Debt Contracting (September 30, 2013). Columbia Business School Research Paper No. 13-47. Available at SSRN: http://ssrn.com/abstract=2283176 or http://dx.doi.org/10.2139/ssrn.2283176

Contact Information

Colleen Honigsberg
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
Sharon P. Katz (Contact Author)
Columbia Business School - Accounting, Business Law & Taxation ( email )
3022 Broadway
New York, NY 10027
United States

Gil Sadka
Columbia Business School - Accounting, Business Law & Taxation ( email )
3022 Broadway
613 Uris Hall
New York, NY 10027
United States
212-854-5391 (Phone)

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