Shareholder Litigation, Shareholder-Creditor Conflict, and the Cost of Bank Loans
University of South Carolina - Moore School of Business
October 6, 2014
I study how the threat of shareholder litigation affects the cost of bank loans using a natural experiment based on a ruling by the Ninth Circuit Court of Appeals that makes class action shareholder litigation more difficult. Using a difference-in-difference method, I find that increasing the difficulty of securities class action suits decreases loan spreads. The effect is stronger for firms with higher institutional ownership, which is consistent with the argument that class actions suits can help shareholders extract wealth from creditors when the firm is in bankruptcy. Further analysis confirms that the effect is in fact stronger for firms closer to bankruptcy.
Number of Pages in PDF File: 45
Keywords: Shareholder Litigation, Bank Loan, Class Action, Wealth Extraction, Bankruptcyworking papers series
Date posted: June 2, 2014 ; Last revised: October 8, 2014
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