Internal governance, legal institutions and bank loan contracting around the world

Wenxia Ge, Jeong-Bon Kim and Byron Y. Song

Journal of Corporate Finance, 2012, vol. 18, issue 3, 413-432

Abstract: Using a sample of non-U.S. firms from 22 countries during 2003–2007, we examine the effect of firm-level governance on various features of loan contracting in the international loan market. We find that banks charge lower loan rates, offer larger and longer-maturity loans, and impose fewer restrictive covenants to better-governed firms. We also find that the favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions than in countries with weak legal institutions. Our results suggest that banks view a borrower's internal governance as a factor that mitigates agency and information risk, and that country-level legal institutions and firm-level governance mechanisms complement each other in influencing loan contracting terms.

Keywords: Corporate governance; Legal origin; Legal enforcement; Loan contracting (search for similar items in EconPapers)
JEL-codes: F34 G21 G32 K22 M41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:3:p:413-432

DOI: 10.1016/j.jcorpfin.2012.01.006

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