Shareholder Litigation, Reputational Loss, and Bank Loan Contracting

Abstract

AbstractWe 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.