Journal article
Do Banks Price Litigation Risk in Debt Contracting? Evidence from Class Action Lawsuits
Q Yuan, Y Zhang
Journal of Business Finance and Accounting | Published : 2015
DOI: 10.1111/jbfa.12164
Abstract
Class action lawsuits can be detrimental to debtholders because they deteriorate defendant firms' financial position and lower these firms' value. This study examines whether banks price their borrowers' litigation risk in debt contracting. We find that banks charge 19% higher interest spreads on loans to lawsuit firms after litigation. In addition, banks monitor lawsuit firms more closely by using tighter non-price terms. The results are robust after correcting for possible endogeneity issues using the propensity score matching approach. We further find that the effects of lawsuit filing are more pronounced for firms with weaker corporate governance. Following a lawsuit in the industry, ban..
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Funding Acknowledgements
Both authors are with the Department of Accounting, University of Melbourne, Australia. The authors would like to thank an anonymous referee, Gary Biddle, Jim Frederickson, Bin Ke, Kevin Li, Brian Rountree (Editor), Wan Wongsunwai (discussant), Anne Wyatt (discussant), Haifeng You (discussant), and participants in the Melbourne Early Career Researcher Symposium 2012, American Accounting Association 2013 Annual Conference, and UTS Australian Summer Accounting Conference 2014 for their helpful comments. Qingbo Yuan acknowledges the Faculty of Business and Economics at University of Melbourne for financial support. (Paper received March 2015, revised version accepted August 2015).