Journal of Banking & Finance Vol. 152 2023
Judge ideology and debt contracting
Abstract
We examine the effect of ex ante litigation risk on the price and non-price terms of loan contracts. Since expected litigation is endogenous, we focus on federal circuit court judge ideology to generate plausibly exogenous variation in the outcome of a class action lawsuit. We find that loans issued by firms headquartered in circuits with a higher likelihood of drawing a liberal panel of judges in a class action lawsuit have higher loan spreads, shorter maturity, and a larger number of and more restrictive covenants. To strengthen our claim that judge ideology affects loan contracting through its effect on the outcome of a class action lawsuit, we show that the influence of judge ideology on price and nonprice terms of loans is strongly influenced by factors that influence the probability of a class action lawsuit. Overall, our results bolster the case that litigation risk has a causal effect on debt contracting.
- DOI
- 10.1016/j.jbankfin.2023.106859
- Volume
- 152
- Pages
- 106859
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib