Published online by Cambridge University Press: 25 August 2020
We develop hypotheses regarding the association between two types of creditor rights and bank loan losses. Contrary to prior research conclusions, bank lending risk is negatively associated with both restrictions on reorganization and the secured creditor being paid first. Using accounting disclosures, we develop novel empirical measures of the probability of default (PD) and loss given default (LGD) at the loan-portfolio level. Different types of creditor rights have differential effects pertaining to PD and LGD and exhibit significant intertemporal variation. We corroborate our cross-country findings using the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) shock to creditor rights.
We thank the anonymous referee, Edward Altman, Allen Berger, Phil Berger, Patty Dechow, Gus DeFranco, Joshua Feldman, Oleg Gredil, Hendrik Hakenes, Jarrad Harford (the editor), Candace Jens, Shuoyuan He, Leslie Hodder, Adrienna Huffman, Nishad Kapadia, David Lesmond, Xu Li, Ke Na, Ryan Peters, Robert Prilmeier, John Pogach, Ken Reichelt, Catherine Schrand, Richard Sloan, Bohan Song, Dushyant Vyas, Xin Wang, Barrett Wheeler, Morad Zekhnini, and Ruizhong Zhang and seminar participants at the University of Hong Kong, Tulane University, the 2018 Insolvency and Bankruptcy Board of India–Indira Gandhi Institute of Development Research (IBBI-IGIDR) Insolvency and Bankruptcy Reforms Conference, the 2018 Federal Deposit Insurance Corporation (FDIC) Fall Banking Research Conference, the 2018 International Risk Management Conference, the 2018 Murphy Law and Regulation Workshop, and the 2018 Tulane Mini-Financial Accounting Research Conference for valuable comments.