Covenant Violations and Dynamic Loan Contracting

Felix Freudenberg, Björn Imbierowicz, Anthony Saunders, Sascha Steffen

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Abstract

This paper examines the dynamic allocation of control rights in private debt contracts of firms. We show that a covenant violation in the prior loan contract implies a stigma for borrowers which results in stricter loan contract terms in subsequent new loan contracts. Our analyses reject potentially other explanations such as firm characteristics or agency problems between the lender and firm management, shareholders or public debtholders. After covenant violations in the prior contract, new loans have on average 18 bps higher spreads and include more of those covenant types which also have been violated in the prior contract, with tighter thresholds.
OriginalsprogEngelsk
TidsskriftJournal of Corporate Finance
Vol/bind45
Sider (fra-til)540–565
Antal sider26
ISSN0929-1199
DOI
StatusUdgivet - aug. 2017

Emneord

  • Control rights
  • Covenant violation
  • Dynamic loan contracting
  • Stigma

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