Covenant Violations and Dynamic Loan Contracting

Felix Freudenberg, Björn Imbierowicz, Anthony Saunders, Sascha Steffen

Research output: Working paperResearch


Covenants are repeatedly violated in private debt contracts by the same borrower. We use covenant violations to test predictions from the incomplete contracting literature and provide supporting evidence that lenders act as “tough principals” to address borrower moral hazard in subsequent new loans increasing loan spreads and implementing a tougher covenant structure. Alternative hypotheses related to (i) credit risk, (ii) disciplining of managers, (iii) bad luck, (iv) hold-up or (v) corporate governance cannot explain our findings. Our results suggest that covenants are important to address informational and agency problems between lenders and firms in dynamic loan contracting.
Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages67
Publication statusPublished - 6 May 2015
Externally publishedYes


  • Dynamic contracting
  • Covenant violation
  • Monitoring
  • Banks
  • Syndicated loans

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