Debt enforcement and bank loans: evidence from insolvency practices worldwide

Gerald J. Lobo, Chong Wang, Yanchao Wang and Feng (Harry) Wu

Asia-Pacific Journal of Accounting & Economics, 2021, vol. 28, issue 1, 153-182

Abstract: Using a novel debt enforcement index reflecting legal and economic characteristics directly relating to resolving insolvency across the world, we document that bank loan terms are more stringent (larger interest rate spread, higher collateral requirement, more covenants) in countries with weaker debt enforcement. The effect is more prominent when creditor rights are better protected and debtors are exposed to higher fundamental and informational risks. Improved enforcement has real effects of reducing borrowers’ covenant violation and enhancing their preference for bank funding. Lenders’ syndicates become more concentrated as loan contract enforceability deteriorates. A difference-in-differences analysis of insolvency resolution reforms worldwide confirms the cross-country evidence.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:taf:raaexx:v:28:y:2021:i:1:p:153-182

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DOI: 10.1080/16081625.2020.1845004

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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