Banking Relationships and Creditor Rights

48 Pages Posted: 22 Apr 2019

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

S Lakshmi Naaraayanan

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Anand Srinivasan

National University of Singapore - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2019

Abstract

Do the legal rights of creditors influence whether firms borrow from arm's length or relationship lenders in a country? In this paper, we examine this question by exploiting the staggered adoption of legal reforms that changed creditor rights. We show that as creditor rights strengthen, firms have a greater propensity to switch to relationship lenders. Conversely, firms switch to arm's length lenders as creditors rights weaken. The results are consistent arm's length creditors having a bias towards excessive liquidation in environments with strong creditor rights. Relationship lenders are less likely to sub-optimally liquidate a firm when continuation is more efficient. We find further support for this interpretation in results that show more pronounced effects for firms expected to suffer a greater value loss from inefficient liquidation.

Keywords: banking relationships, creditor rights, liquidation bias, arm's length creditors

JEL Classification: D23, G21, G32, K42

Suggested Citation

Goyal, Vidhan K. and Naaraayanan, S Lakshmi and Srinivasan, Anand, Banking Relationships and Creditor Rights (March 25, 2019). Available at SSRN: https://ssrn.com/abstract=3352583 or http://dx.doi.org/10.2139/ssrn.3352583

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

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

S Lakshmi Naaraayanan

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Anand Srinivasan

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

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