Internal Governance, Legal Institutions and Bank Loan Contracting Around the World

51 Pages Posted: 20 Feb 2013

See all articles by Wenxia Ge

Wenxia Ge

University of Ottawa

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Byron Y. Song

Concordia University, Quebec - John Molson School of Business

Abstract

Using a sample of non-U.S. firms from 22 countries during 2003–2007, we examine the effect of firm-level governance on various features of loan contracting in the international loan market. We find that banks charge lower loan rates, offer larger and longer-maturity loans, and impose fewer restrictive covenants to better-governed firms. We also find that the favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions than in countries with weak legal institutions. Our results suggest that banks view a borrower’s internal governance as a factor that mitigates agency and information risk, and that country-level legal institutions and firm-level governance mechanisms complement each other in influencing loan contracting terms.

Keywords: corporate governance, legal origin, legal enforcement, loan contracting

JEL Classification: F34, G21, G32, K22, M41

Suggested Citation

Ge, Wenxia and Kim, Jeong-Bon and Song, Byron Y., Internal Governance, Legal Institutions and Bank Loan Contracting Around the World. Journal of Corporate Finance, Vol. 18, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2220845

Wenxia Ge (Contact Author)

University of Ottawa ( email )

55 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Byron Y. Song

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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