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

Wenxia Ge; Jeong-Bon Kim; Byron Y. Song

doi:10.1016/j.jcorpfin.2012.01.006

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

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

Research output: Contribution to journal › Journal article › peer-review

71 Citations (Scopus)

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.

Original language	English
Pages (from-to)	413-432
Journal	Journal of Corporate Finance
Volume	18
Issue number	3
DOIs	https://doi.org/10.1016/j.jcorpfin.2012.01.006
Publication status	Published - Jun 2012

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10.1016/j.jcorpfin.2012.01.006

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

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. ",

author = "Wenxia Ge and Jeong-Bon Kim and Song, \{Byron Y.\}",

note = "W. Ge acknowledges funding support from the Institute of Chartered Accountants of Manitoba and from the University of Manitoba start-up grant. J.-B. Kim acknowledges partial financial support for this project from the GRF grant from the Hong Kong SAR government. B. Song acknowledges partial financial support for this project from the Faculty Research Development Program (FRDP), John Molson School of Business, Concordia University. ",

year = "2012",

month = jun,

doi = "10.1016/j.jcorpfin.2012.01.006",

language = "English",

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journal = "Journal of Corporate Finance",

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TY - JOUR

T1 - Internal governance, legal institutions and bank loan contracting around the world

AU - Ge, Wenxia

AU - Kim, Jeong-Bon

AU - Song, Byron Y.

N1 - W. Ge acknowledges funding support from the Institute of Chartered Accountants of Manitoba and from the University of Manitoba start-up grant. J.-B. Kim acknowledges partial financial support for this project from the GRF grant from the Hong Kong SAR government. B. Song acknowledges partial financial support for this project from the Faculty Research Development Program (FRDP), John Molson School of Business, Concordia University.

PY - 2012/6

Y1 - 2012/6

N2 - 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.

AB - 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.

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U2 - 10.1016/j.jcorpfin.2012.01.006

DO - 10.1016/j.jcorpfin.2012.01.006

M3 - Journal article

SN - 0929-1199

VL - 18

SP - 413

EP - 432

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

IS - 3

ER -

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

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