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.
Bibliographical noteThis 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.
- Debt enforcement
- bank loan contracting
- insolvency practice