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Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms
Author(s) -
Ackert Lucy F.,
Huang Rongbing,
Ramírez Gabriel G.
Publication year - 2007
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/j.1468-0416.2007.00125.x
Subject(s) - loan , business , covenant , collateralized debt obligation , sample (material) , finance , private information retrieval , financial system , collateral , philosophy , chemistry , statistics , theology , mathematics , chromatography
This paper examines the structure and cost of a large sample of bank loans to private firms. Compared to public firms, private firms are more informationally opaque and riskier. The results suggest that the design of a loan to a private firm is significantly different from that to a public firm. Bank loans to private firms are more likely to be by a sole lender, collateralized, and have sweep covenants than loans to public firms. The cost of borrowing is higher for a private firm than for a public firm, even after holding constant firm and loan characteristics.