Should companies care who their lender is? Evidence from loan covenants

Di Kang and Zhuang Zhuang

Pacific-Basin Finance Journal, 2019, vol. 57, issue C

Abstract: Non-bank lenders are an increasingly important part of the syndicated loan market, particularly for riskier borrowers who require intensive monitoring. Interestingly, when non-bank lenders arrange loans, they impose fewer and looser covenants. Although the prior literature shows that banks play an active role in corporate governance following covenant violations, non-banks are not likely to intervene in borrowers’ decision making in similar circumstances. We also investigate possible explanations for the weak enforcement of loan covenants by non-banks and find that non-bank lenders do not appear to improve their monitoring abilities by learning from previous default experiences on loan portfolios as banks do.

Keywords: Non-banks; Financial covenants; Covenant violations (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18300921

DOI: 10.1016/j.pacfin.2018.06.007

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