Shareholder Rights and Non-Price Loan Contract Terms

Abstract

This paper analyzes the impact of shareholder rights on non-price loan contract terms. Using a large sample of syndicated loans borrowed by U.S. firms between 1991 and 2006, I find that stronger shareholder rights significantly enhance the stringency of loan contract design. The likelihood of having collateral significantly increases with the strength of shareholder rights. Loan maturity of firms with the strongest shareholder rights is 13.1% shorter. The loan size of the same borrowing firms is 8.4% smaller. These results are robust to different proxies of shareholder rights and are robust to the instrumental variable approach controlling for simultaneous determination of loan contract terms, such as collateral and maturity. This study complements the existing literature on the impact of shareholder rights on loan pricing and has important implications for understanding the impact of companies’ governance structure on loan contract design.