Bridging the gap: The design of bank loan contracts and distance

Stephan Hollander, A.J.M. Verriest

Research output: Contribution to journalArticleScientificpeer-review

Abstract

How do the distance constraints faced by lenders in acquiring borrower information affect the design of bank loan contracts? Theoretical studies posit that greater information asymmetry leads to the allocation of stronger ex ante decision rights to the lender (the uninformed party). Consistent with this hypothesis, we find that, upon inception, contracts tend to be more restrictive when firms seek loans from remote lenders. This finding is robust to potential endogeneity bias and simultaneity of various loan terms. Overall, we establish a strong informational link between distance and loan contract design.
Original languageEnglish
Pages (from-to)399-419
JournalJournal of Financial Economics
Volume119
Issue number2
DOIs
Publication statusPublished - Feb 2016

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Loans
Bank loans
Endogeneity bias
Contract design
Information asymmetry
Decision rights
Simultaneity

Keywords

  • private debt
  • debt covenants
  • geographical distance
  • information asymmetry

Cite this

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abstract = "How do the distance constraints faced by lenders in acquiring borrower information affect the design of bank loan contracts? Theoretical studies posit that greater information asymmetry leads to the allocation of stronger ex ante decision rights to the lender (the uninformed party). Consistent with this hypothesis, we find that, upon inception, contracts tend to be more restrictive when firms seek loans from remote lenders. This finding is robust to potential endogeneity bias and simultaneity of various loan terms. Overall, we establish a strong informational link between distance and loan contract design.",
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Bridging the gap: The design of bank loan contracts and distance. / Hollander, Stephan; Verriest, A.J.M.

In: Journal of Financial Economics, Vol. 119, No. 2, 02.2016, p. 399-419.

Research output: Contribution to journalArticleScientificpeer-review

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KW - private debt

KW - debt covenants

KW - geographical distance

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