Do Creditor Rights Affect Financial Contracts? Evidence from the Anti-Recharacterization Statute
54 Pages Posted: 17 Oct 2019 Last revised: 2 Dec 2019
Date Written: November 5, 2019
This paper examines the effect of creditor rights on bank loan contract design. Focusing on the conflict of interest between creditors, I study how bank lenders respond to a legal change that strengthens the rights of securitization creditors. Improving the power of securitization creditors to seize their collateral in bankruptcy reduces their incentives to maximize recoveries in chapter 11, increasing the risk of other competing creditors, such as banks. I find that loans granted to firms using asset securitization have higher interest rates, higher fees, smaller size, and more covenant restrictions after the law change. These effects are stronger for firms with higher default risk, for which the legal change may have a bigger impact. My findings thus highlight how increasing the power of some corporate creditors affects the other financial contracts of the firm.
Keywords: Creditor Rights, Bankruptcy, Incentive Conflicts, Financial Contracting, Bank Loans, Securitization, Anti-recharacterization Law Ant
JEL Classification: G30, G32, G33, K22
Suggested Citation: Suggested Citation