Shareholder Litigation, Reputational Loss, and Bank Loan Contracting
58 Pages Posted: 6 Sep 2013 Last revised: 4 Oct 2013
Date Written: December 4, 2012
We examine shareholder litigation and the price and non-price terms of bank loan contracts. After the lawsuit filing, defendant firms pay higher loan spreads, up-front charges, experience more financial covenants, and are more likely to have a collateral requirement. These findings are consistent with reputational losses associated with shareholder litigation. The magnitude of a firm’s lost market value when the lawsuit is filed is positively related to the increase in the firm’s future borrowing costs. We investigate whether the lawsuit allegations and its merit affect future bank loan terms. Our results do not appear to be affected by self-selection.
Keywords: Litigation, Cost of bank debt, Bank loan contracting, Reputational loss, Endogeneity
JEL Classification: G21, G32, K22
Suggested Citation: Suggested Citation