How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans




    Search for more papers by this author
    • Both authors are at the Carroll School of Management, Boston College and are affiliated with the Wharton Financial Institutions Center; Strahan is also affiliated with the NBER. We appreciate helpful comments from an anonymous referee and an associate editor, Franklin Allen, Thorsten Beck, Cliff Holderness, Ross Levine, Katharina Pistor, Andrei Shleifer, Amir Sufi, Bernard Yeung, and seminar participants at the Bank of England, Boston College, Bundesbank, Federal Deposit Insurance Corporation, the Federal Reserve Banks of New York and Philadelphia, Harvard, INSEAD, London Business School, Rice, Texas A&M, the American Finance Association meetings in Philadelphia, and the Financial Intermediation Research Society meetings in Capri, Italy. Geraldine Hough, Frank Corrado, Jean-Marc Donics, Mehrun Etebari, Daniel Yang, and Zhe Xu provided excellent research assistance. We gratefully acknowledge Florencio Lopez-de-Silanes and Richard Cantor for providing data on creditor rights and sovereign debt ratings, and Boston College for financial support. The authors are responsible for all remaining errors.


Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.