Three essays on credit contracts

This study contains three essays. In the first chapter, we tested the claim that in emerging economies institutional and regulatory constraints deter lenders from monitoring and disciplining firms by studying the experience of South Korean chaebols and their reform of the late nineties. Building on Holmstrom and Tirole (1997) and Sufi (2007), we argue that when a firm is granted a syndicated loan the lead bank retains a large share of the loan to commit to monitoring the borrower. We find evidence that the institutional arrangements of chaebols - especially the bailout protection offered by the South Korean government - diluted lenders' incentives to monitor chaebol firms, as reflected by the concentration of syndicated loans. However, after the reform dismantled the chaebol safety net in the late nineties, banks stepped up their monitoring effort (and toughened lending standards). Although internal governance mechanisms tend to compensate for the lack of creditors' monitoring, in our data such substitutability appears to be only partial.;In the second chapter, I investigated the effects of the protection of creditors' rights on the structure of syndicated loans, such as the shares of the loan held by the lead arrangers and the loan distribution between the lead arrangers and the participant lenders. I found that the average loan concentration (proxy for the intensity of monitoring efforts by the lead arrangers) of the firm, which sets up more provisions for protecting creditor's rights, is lower and the likelihood of the creditors' holding collateral is smaller. However the extent of the impact of such protection on the loan concentration also depends on the degree of the product market competition the firm faces. For the firms that belong to the highly competitive product markets, I found that the impact of the G index is pronounced and the creditors are less likely to hold collateral, and embed fewer financial covenants when the firms are prone to protect creditors' rights.;In the last chapter, I examine the impact of firms' asset liquidation value which is proxied by asset liquidity on debt contracting using comprehensive US syndicated loan contracts. I employ various measures of the asset liquidity at the three-digit industry level. The borrower, belonging to a higher asset liquidity industry at the time of loan origination, experiences a lower loan spread. However as the maturity of a loan increases the impact of the asset liquidity declines. Furthermore I found that the loan spreads are affected by the number of lenders because of the concern about coordination failures, and by the possibility of the borrower's being involved in M&A activities. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure.