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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)413-432
Journal / PublicationJournal of Corporate Finance
Issue number3
Publication statusPublished - Jun 2012


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. © 2012 Elsevier B.V.

Research Area(s)

  • Corporate governance, Legal enforcement, Legal origin, Loan contracting