Shareholder Litigation, Shareholder-Creditor Conflict, and the Cost of Bank Loans
50 Pages Posted: 2 Jun 2014 Last revised: 30 Dec 2014
Date Written: December 29, 2014
I study how the threat of shareholder litigation affects the cost of bank loans using a natural experiment based on a ruling by the Ninth Circuit Court of Appeals. Using a difference-in-differences method, I find that increasing the difficulty of securities class action suits decreases loan spreads. The effect is stronger for firms with higher institutional ownership, which is consistent with the argument that class actions suits help shareholders extract wealth from creditors when the firm is in bankruptcy. Further analysis confirms that the effect is in fact stronger for firms closer to bankruptcy.
Keywords: Shareholder Litigation, Shareholder-Creditor Conflict, Bankruptcy, Value Destruction
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