#04-20
How Law and Institutions Shape Financial Contracts: The Case of Bank Loans
Jun Qian and Philip E. Strahan
Abstract: We examine empirically how legal origin, creditor rights, property rights, legal formalism, and
financial development affect the design of price and non-price terms of bank loans in almost 60
countries. Our results support the law and finance view that private contracts reflect differences in
legal protection of creditors and the enforcement of contracts. Loans made to borrowers in
countries where creditors can seize collateral in case of default are more likely to be secured, have
longer maturity, and have lower interest rates. We also find evidence, however, that ‘Coasian’
bargaining can partially offset weak legal or institutional arrangements. For example, lenders
mitigate risks associated with weak property rights and government corruption by securing loans
with collateral and shortening maturity. Our results also suggest that the choice of loan ownership
structure affects loan contract terms.
Keywords: Creditor rights, legal origin, institution, legal formalism, bank loan.
JEL classifications : K0, G2, O5.
