Do Shareholder Rights Affect the Cost of Bank Loans?

Posted: 5 Aug 2009

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Dmitry Livdan

University of California, Berkeley

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2009

Abstract

Using a large sample of bank loans issued to U.S. firms between 1990 and 2004, we find that lower takeover defenses (as proxied by the lower G-index of Gompers, Ishii, and Metrick 2003) significantly increase the cost of loans for a firm. Firms with lowest takeover defense (democracy) pay a 25% higher spread on their bank loans as compared with firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge a higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans.

Keywords: G21, G32, G34

Suggested Citation

Chava, Sudheer and Livdan, Dmitry and Purnanandam, Amiyatosh, Do Shareholder Rights Affect the Cost of Bank Loans? (August 2009). The Review of Financial Studies, Vol. 22, Issue 8, pp. 2973-3004, 2009, Available at SSRN: https://ssrn.com/abstract=1443062 or http://dx.doi.org/hhn111

Sudheer Chava (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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