Debt enforcement and bank loans: evidence from insolvency practices worldwide

Gerald J. LOBO, Chong WANG, Yanchao WANG, Feng (Harry) WU

Research output: Journal PublicationsJournal Article (refereed)peer-review

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)153-182
JournalAsia-Pacific Journal of Accounting and Economics
Volume28
Issue number1
Early online date11 Nov 2020
DOIs
Publication statusPublished - 2021

Bibliographical note

This article is based on a paper that received the “Best Paper” award at the 8th conference of the World Accounting Frontiers Series (WAFS). Chong Wang acknowledges research supports from the Social Science Youth Program of Fujian Province (No. FJ2018C036) and School of Accounting and Finance, Hong Kong Polytechnic University. Yanchao Wang acknowledges research support from the Natural Science Foundation of China (No. 71972194). Feng (Harry) Wu acknowledges research support from Department of Accountancy, Faculty of Business, Lingnan University. All errors are our own.

Keywords

  • Debt enforcement
  • bank loan contracting
  • insolvency practice

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