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Shareholder Litigation, Reputational Loss, and Bank Loan Contracting

Published online by Cambridge University Press:  23 January 2015

Saiying Deng ,
Richard H. Willis  and
Li Xu
Saiying Deng
Affiliation:
sdeng@business.siu.edu, College of Business, Southern Illinois University, 126A Rehn Hall, Mail Code 4626, Carbondale, IL 62901
Richard H. Willis
Affiliation:
richard.willis@owen.vanderbilt.edu, Owen Graduate School of Management, Vanderbilt University, 401 21st Ave S, Nashville, TN 37203
Li Xu
Affiliation:
li.xu@tricity.wsu.edu, College of Business, Washington State University, Wilson Rd, Richland, WA 99354.
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Abstract

We examine shareholder litigation and the price and nonprice terms of bank loan contracts. After filing a lawsuit, defendant firms pay higher loan spreads and up-front charges, experience more financial covenants, and are more likely to have a collateral requirement. These findings are consistent with reputational losses associated with shareholder litigation. The magnitude of a firm’s lost market value when the lawsuit is filed is positively related to the increase in the firm’s future borrowing costs. We investigate whether the lawsuit allegations and its merit affect future bank loan terms. Our results do not appear to be affected by self-selection.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 4 , August 2014 , pp. 1101 - 1132
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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