Why Do Loans Contain Convenants? Evidence from Lending Relationships
Speaker
Abstract
| The use of financial covenants varies widely across loans. While existing theoretical papers provide hypotheses as to why some loans have more financial covenants than others, the empirical evidence on these theories is very limited. In this paper, I test these theories comprehensively using a novel identification approach based on lending relationships. Using a large sample of corporate loans, I find that borrowers trade off monitoring benefits with covenant-created hold-up costs, such that the effect of lending relationship intensity on the number of covenants included in a loan follows an inverted U shape. Consistent with covenant tightness addressing information asymmetry concerns, tightness is relaxed over the course of a relationship. |
| Contact information: |
| Myra Lissenberg |
