International Lending: The Role of Creditor Laws and Self Selection

Abstract

The multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower creditor rights is the main limiting factor to cross-border lending. We argue that lender country’s creditor rights can substitute for weak borrower creditor rights if a lender is from a better creditor rights country. Consistent with this argument, we find a strong relationship between lender laws and multinational loan contract terms. Importantly, we control for a borrower’s endogenous choice of lender, its country laws, its foreign assets, and loan guarantees provided by the borrower’s parent company or major shareholders.

Keywords: International Finance, Multinational Loans, Creditor Rights, Property Rights, Borrower self-selection

JEL Classification: F34, G15, G33, O16