Creditor Rights and Loan Terms

Treasurers and CFOs know that the extent to which creditors’ rights are protected in different countries affects just how much and to whom lenders are willing to extend credit. Indeed, a recent study, “Creditor Rights, Enforcement, and Bank Loans,” by Kee-Hong Bae at York University and Vidhan Goyal at the Hong Kong University of Science and Technology, illustrates the dramatic impact creditor protection can have. The study appeared in the April 2009 issue of the Journal of Finance.

As Bae and Goyal note, in countries in which creditor rights are weak or poorly enforced, banks can be expected to charge higher interest rates, lend less, and/or shorten loan maturities. To determine how much of an impact creditor rights have, the duo examined some 63,000 loans issued between 1994 and 2003 to firms in 48 countries. (more…)