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How Law and Institutions Shape Financial Contracts: The Case of Bank Loans

Jun Qian
Boston College - Finance Department; University of Pennsylvania - Wharton Financial Institutions Center; China Academy of Financial Research (CAFR)

Philip E. Strahan
Boston College - Department of Finance; National Bureau of Economic Research (NBER)

August 12, 2006

AFA 2005 Philadelphia Meetings Paper

Abstract:
Legal and institutional differences shape the ownership and terms of bank loans across the world. With strong creditor protection, we show that loans have concentrated ownership, long maturity and low interest rates. The impact of creditor rights on loans also depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment. Their ownership declines relative to domestic banks as creditor protection falls. Our multi-dimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.

Keywords: Creditor rights, institution, bank loan, collateral, maturity

JEL Classifications: K0, G2, O5

Working Paper Series

Date posted: February 16, 2004 ; Last revised: September 11, 2009

Suggested Citation

Qian, Jun and Strahan, Philip E., How Law and Institutions Shape Financial Contracts: The Case of Bank Loans (August 12, 2006). AFA 2005 Philadelphia Meetings Paper. Available at SSRN: http://ssrn.com/abstract=935927 or doi:10.2139/ssrn.501662

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Contact Information

Jun Qian (Contact Author) Boston College - Finance Department ( email ) Wallace E. Carroll School of Management 330 Fulton Hall Chestnut Hill, MA 02467 United States 617-552-3145 (Phone) 617-552-0431 (Fax) HOME PAGE: http://www2.bc.edu/~qianju
University of Pennsylvania - Wharton Financial Institutions Center ( email ) 2306 Steinberg Hall-Dietrich Hall Philadelphia, PA 19104 United States HOME PAGE: http://fic.wharton.upenn.edu/fic/
China Academy of Financial Research (CAFR) 1954 Huashan Road Shanghai P.R.China, 200030 China
Philip E. Strahan Boston College - Department of Finance ( email ) Carroll School of Management 140 Commonwealth Avenue Chestnut Hill, MA 02467-3808 United States 617-552-6430 (Phone) 617-552-0431 (Fax) HOME PAGE: http://www2.bc.edu/~strahan
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States