VGSF - WU Vienna - LC

Hans Degryse, KU Leuven

online via Zoom 11:00 - 12:15

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Hans De­gryse from KU Leuven to present his re­search pa­per.
Per­sonal Webpage

Pa­per

Banks and Firms: Evid­ence from a legal re­form al­ter­ing con­tract design

Banks are unique in design­ing loan con­tracts. Con­tract design de­termines li­quid­a­tion and con­tinu­ation de­cisions of firms. Smal­ler firms are often the weaker party when in­ter­act­ing with their banks. We study a legal re­form that aims to im­prove small firms’ bar­gain­ing pos­i­tion by al­ter­ing the con­trac­tual en­vir­on­ment. The new law gives small firms the right to pre­pay loans against a con­trac­tu­ally spe­cified pen­alty and re­quires banks to of­fer firms’ be­st-­suited loan type. Us­ing this quasi-nat­ural ex­per­i­ment, we show that, while the legal re­form in­creases over­all credit avail­ab­il­ity, banks dampen the ef­fect of the act by tilt­ing their credit sup­ply to loans that are un­af­fected by the legal change, i.e., credit lines. Us­ing bank-firm­-cred­it-­type data, we show that banks re­duce the sup­ply of term loans by 0.7% while credit lines in­crease by 4%. This ef­fect is more pro­nounced for bor­row­ers with longer re­la­tion­ships. Our res­ults show that re­forms gen­er­ate un­in­ten­ded con­sequences since banks stra­tegic­ally try to undo part of the reg­u­la­tion.



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