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Corporate Misconduct and the Cost of Private Debt: Evidence from China

  • Xian Gu
  • Iftekhar HasanEmail author
  • Haitian Lu
Article

Abstract

Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.

Keywords

Litigation Loan spreads Political connection Relationship 

JEL Classification

G12 G14 L14 

Notes

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Copyright information

© Association for Comparative Economic Studies 2019

Authors and Affiliations

  1. 1.Central University of Finance and EconomicsBeijingChina
  2. 2.Fordham UniversityNew YorkUSA
  3. 3.Bank of FinlandHelsinkiFinland
  4. 4.University of SydneySydneyAustralia
  5. 5.Hong Kong Polytechnic UniversityKowloonHong Kong

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