Banking Relationships And Creditor Rights

Vidhan Goyal, S. Lakshmi Naaraayanan and Anand Srinivasan
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S. Lakshmi Naaraayanan: Hong Kong University of Science and Technology
Anand Srinivasan: National University of Singapore

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

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 (search for similar items in EconPapers)
JEL-codes: D23 G21 G32 K42 (search for similar items in EconPapers)
Pages: 40
Date: 2019-10
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Published in the Quarterly Journal of Finance

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Journal Article: Banking Relationships and Creditor Rights (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022301

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