Content area
Full text
Abstract
Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we examine the relation between legal risk and debt ownership structure. The tranches exhibit high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical tranche. In countries with strong creditor rights and reliable legal enforcement, lenders create smaller and more concentrated syndicates to facilitate monitoring and low cost contracting. When lenders cannot rely on legal enforcement mechanisms to protect their claims, they create larger and more diffuse syndicates as a way to deter strategic default.
I. Introduction
Using the power of cross-country comparisons, economists have documented a relation between legal rules and such things as corporate ownership, financing policies, and capital allocation. Studies by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (LLSV) (1998), (2000) show that common law systems provide stronger investor protection than civil law systems, and that stronger investor protection encourages investors to hold smaller equity positions without fearing expropriation by majority shareholders or other insiders. As a result, we observe more diffuse equity ownership structures in countries with stronger investor protection (La Porta, Lopez-de-Silanes, and Shleifer (1999), Claessens et al. (2000)). Related work shows that stronger investor protection and better legal enforcement results in larger and more efficient capital markets (LLSV (1997)), higher equity values (LLSV (2002), Claessens et al. (2002)) and faster economic growth (Demirguc-Kunt and Maksimovic (1998), Levine (1999), and Wurgler (2000)).
Virtually all of this research, however, has focused on shareholder rights, equity ownership, and governance by large shareholders. Yet debt markets have historically provided a much greater percentage of external finance than equity markets, at least in developed countries. Logically, legal rules (creditor rights) and enforcement should also affect debt-financing policies. As a first step toward understanding the relation between debt financing and corporate governance, we analyze how legal risk-defined as the strength and enforcement of creditor rights-- affects the structure of debt ownership using a sample of international syndicated loans. Although there is some theoretical research on the structure of debt ownership and the nature of governance by banks available to guide us, there is relatively little empirical research on either topic.1 While...