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Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms

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  • Lucy F. Ackert
  • Rongbing Huang
  • Gabriel G. Ramírez

Abstract

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.

Suggested Citation

  • Lucy F. Ackert & Rongbing Huang & Gabriel G. Ramírez, 2007. "Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 16(5), pages 221-242, December.
    • Handle: RePEc:wly:finmar:v:16:y:2007:i:5:p:221-242
    DOI: 10.1111/j.1468-0416.2007.00125.x
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