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.
- private debt
- debt covenants
- geographical distance
- information asymmetry
Hollander, S., & Verriest, A. J. M. (2016). Bridging the gap: The design of bank loan contracts and distance. Journal of Financial Economics, 119(2), 399-419. https://doi.org/10.1016/j.jfineco.2015.09.006