Creditor Rights and Aggregate Factors in Loan Terms

48 Pages Posted: 8 Nov 2018

See all articles by Anzhela Knyazeva

Anzhela Knyazeva

Independent; New York University (NYU) - Leonard N. Stern School of Business

Diana Knyazeva

Independent

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: October 26, 2018

Abstract

Weak creditor rights introduce contracting frictions and magnify conflicts of interest between borrowers and creditors. We examine the effects of creditor rights on the sensitivity of bank lending terms to aggregate relative to firm-specific information. We formulate two competing hypotheses. On the one hand, weaker creditor rights can amplify the bank’s screening and monitoring role, increasing the value of firm-specific information for the pricing of default risk. On the other hand, weaker creditor rights increase the incentives and ability of solvent borrowers to default strategically, particularly when aggregate performance is weak. Empirically, we find that loan spreads become more sensitive to aggregate factors and less sensitive to firm-specific fundamentals when creditor rights are weaker, consistent with the second prediction. Our findings suggest that weak creditor rights reduce the ability of borrowers with strong fundamentals to raise bank debt, lead to more correlated bank lending decisions, and may decrease allocative efficiency.

Keywords: creditor rights; bank lending; incomplete contracting; aggregate conditions

JEL Classification: G21, G30, G32, K40, F34

Suggested Citation

Knyazeva, Anzhela and Knyazeva, Diana and Stiglitz, Joseph E., Creditor Rights and Aggregate Factors in Loan Terms (October 26, 2018). Columbia Business School Research Paper No. 18-78. Available at SSRN: https://ssrn.com/abstract=3273467 or http://dx.doi.org/10.2139/ssrn.3273467

Anzhela Knyazeva

Independent ( email )

No Address Available

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Diana Knyazeva (Contact Author)

Independent ( email )

No Address Available

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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