Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market

33 Pages Posted: 30 Jul 2002

See all articles by Benjamin Esty

Benjamin Esty

Harvard Business School

William L. Megginson

University of Oklahoma

Date Written: June 24, 2002

Abstract

This paper examines the relation between legal risk - defined as the strength and enforcement of creditors' rights - and debt ownership concentration to understand the various governance roles played by banks as large creditors. Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we document high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical loan tranche. We also show that syndicates in countries with weak creditor rights and poor legal enforcement are larger and more diffuse. Based on this finding, we conclude that lenders structure loan syndicates to facilitate monitoring and low-cost re-contracting in countries where creditors have strong and enforceable legal rights. In contrast, lenders attempt to deter strategic defaults by creating larger and more diffuse syndicates when they cannot resort to legal enforcement mechanisms to protect their claims.

Keywords: creditor rights, international corporate governance, bank lending, project finance, syndication

JEL Classification: G21, G32, F34, K33

Suggested Citation

Esty, Benjamin C. and Megginson, William L., Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market (June 24, 2002). Tuck-JQFA Contemporary Corporate Governance Issues II Conference. Available at SSRN: https://ssrn.com/abstract=320226 or http://dx.doi.org/10.2139/ssrn.320226

Benjamin C. Esty (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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