Abstract

http://ssrn.com/abstract=2283176
 
 

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State Contract Law and Debt Contracts


Colleen Honigsberg


Columbia University - Columbia Business School

Sharon P. Katz


Columbia Business School - Accounting, Business Law & Taxation

Gil Sadka


University of Texas at Dallas

April 17, 2014

Columbia Business School Research Paper No. 13-47

Abstract:     
This paper examines the relationship between debt contracts and state contract law. We first develop an index to evaluate whether each state's law is favorable or unfavorable to lenders. We then analyze how the contract terms, the frequency of covenant violations, and the repercussions of covenant violations vary across states. We find that cash collateral is most likely to be used when the contract is governed by law that is favorable to debtors, and that out-of-state borrowers who use favorable law pay higher yields. Additionally, when the law is favorable to lenders, there are significantly fewer covenant violations and the repercussions of covenant violations --- measured as changes in the borrower's investment policy --- are more severe. We also compare the characteristics of relevant parties across states, and the results provide support for the theory that there is a market for contracts similar to the market for incorporations.

Number of Pages in PDF File: 40

Keywords: debt contracts, legal environment, corporate finance, law and economics

JEL Classification: G30, K12, M21, M41

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Date posted: June 23, 2013 ; Last revised: May 12, 2014

Suggested Citation

Honigsberg , Colleen and Katz, Sharon P. and Sadka, Gil, State Contract Law and Debt Contracts (April 17, 2014). 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
University of Texas at Dallas ( email )
2601 North Floyd Road
Richardson, TX 75083
United States
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