Bridging the Gap: The Design of Bank Loan Contracts and Distance

78 Pages Posted: 27 Sep 2011 Last revised: 8 Apr 2015

See all articles by Stephan Hollander

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management

Arnt Verriest

KU Leuven

Date Written: March 25, 2015

Abstract

How do the distance constraints faced by lenders in acquiring borrower information affect the design of bank loan contracts? Theoretical studies posit that greater information asymmetry leads to the allocation of stronger ex ante decision rights to the lender (the uninformed party). Consistent with this hypothesis, we find that, upon inception, contracts tend to be more restrictive when firms seek loans from remote lenders. This finding is robust to potential endogeneity bias and simultaneity of various loan terms. Overall, we establish a strong informational link between distance and loan contract design.

Keywords: Private debt; Debt covenants; Geographical distance; Information asymmetry

JEL Classification: M40; G21; G32

Suggested Citation

Hollander, Stephan and Verriest, Arnt, Bridging the Gap: The Design of Bank Loan Contracts and Distance (March 25, 2015). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1934195 or http://dx.doi.org/10.2139/ssrn.1934195

Stephan Hollander (Contact Author)

Tilburg University - Tilburg School of Economics and Management ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands
+31 13 466 8288 (Phone)
+31 13 466 8001 (Fax)

HOME PAGE: http://www.uvt.nl/people/s.hollander

Arnt Verriest

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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