Abstract

http://ssrn.com/abstract=2283176
 
 

References (31)



 


 



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

July 29, 2014

Journal of Law and Economics, Vol. 57, Forthcoming

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 yield spreads. 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.

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

JEL Classification: G30, K12, M21, M41

Accepted Paper Series





Not Available For Download

Date posted: June 23, 2013 ; Last revised: July 30, 2014

Suggested Citation

Honigsberg , Colleen and Katz, Sharon P. and Sadka, Gil, State Contract Law and Debt Contracts (July 29, 2014). Journal of Law and Economics, Vol. 57, Forthcoming . 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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