Judge ideology and debt contracting

Thomas R. Kubick, G. Brandon Lockhart and David C. Mauer

Journal of Banking & Finance, 2023, vol. 152, issue C

Abstract: We examine the effect of ex ante litigation risk on the price and non-price terms of loan contracts. Since expected litigation is endogenous, we focus on federal circuit court judge ideology to generate plausibly exogenous variation in the outcome of a class action lawsuit. We find that loans issued by firms headquartered in circuits with a higher likelihood of drawing a liberal panel of judges in a class action lawsuit have higher loan spreads, shorter maturity, and a larger number of and more restrictive covenants. To strengthen our claim that judge ideology affects loan contracting through its effect on the outcome of a class action lawsuit, we show that the influence of judge ideology on price and nonprice terms of loans is strongly influenced by factors that influence the probability of a class action lawsuit. Overall, our results bolster the case that litigation risk has a causal effect on debt contracting.

Keywords: Judge ideology; Litigation risk; Bank loans; Debt contracting (search for similar items in EconPapers)
JEL-codes: G21 G32 K22 K41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:152:y:2023:i:c:s0378426623000833

DOI: 10.1016/j.jbankfin.2023.106859

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