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

Legal and institutional differences shape the ownership and terms of bank loans across the world. With strong creditor protection, we show that loans have concentrated ownership, long maturity and low interest rates. The impact of creditor rights on loans also depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment. Their ownership declines relative to domestic banks as creditor protection falls. Our multi-dimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies