Banking Relationships and Creditor Rights

Forthcoming, Quarterly Journal of Finance, Vol. 9. No. 4, 2019

40 Pages Posted: 25 Oct 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; CAFRAL, Reserve Bank of India

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2019

Abstract

Do the legal rights of creditors influence whether firms borrow from arm’s length or relationship lenders in a country? We examine this question by exploiting the staggered adoption of legal reforms that changed creditor rights. We find that as creditor rights strengthen, firms exhibit a greater propensity to switch to relationship lenders. Conversely, firms switch to arm’s length lenders as creditors rights weaken. These results are consistent with the view that arm’s length creditors have a bias towards excessive liquidation in environments with strong creditor rights. Hence as creditor rights strengthen, firms switch to relationship lenders as they are less likely to sub-optimally liquidate the firm when continuation is more efficient.

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 (August 5, 2019). Forthcoming, Quarterly Journal of Finance, Vol. 9. No. 4, 2019. Available at SSRN: https://ssrn.com/abstract=3470526

Vidhan K. Goyal

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 (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

CAFRAL, Reserve Bank of India ( email )

C-8, 8th Floor, Reserve Bank of India
Bandra-Kurla Complex, Bandra (East)
Mumbai, Maharashtra 400051
India

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