Shareholder Litigation, Reputational Loss, and Bank Loan Contracting

58 Pages Posted: 6 Sep 2013 Last revised: 4 Oct 2013

See all articles by Saiying Deng

Saiying Deng

Kent State University

Richard H. Willis

Vanderbilt University - Accounting

Li Xu

Washington State University, Vancouver

Date Written: December 4, 2012

Abstract

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

Deng, Saiying and Willis, Richard H. and Xu, Li, Shareholder Litigation, Reputational Loss, and Bank Loan Contracting (December 4, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Vanderbilt Owen Graduate School of Management Research Paper No. 2320785, Available at SSRN: https://ssrn.com/abstract=2320785

Saiying Deng

Kent State University ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
3306721213 (Phone)

Richard H. Willis (Contact Author)

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

Li Xu

Washington State University, Vancouver ( email )

14204 NE Salmon Creek Avenue
Vancouver, WA WA 98686-9600
United States

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