Senior Lender Control: Monitoring Spillover or Creditor Conflict?

Bo Li, Lynnette Purda and Wei Wang

Journal of Law, Finance, and Accounting, 2018, vol. 3, issue 2, 373-411

Abstract: This paper studies the effect of senior lender control, as measured by bank loan covenants, on the pricing of new bond issues. We find a U-shaped relation between the number of financial covenants on a firm’s loan contract and the bond yield spread. Our results suggest that bondholders initially value the monitoring benefits derived from loan covenants; as lender control becomes excessive, however, bondholders require compensation for the risk of losses due to creditor conflicts. Our heterogeneity tests show that the positive relation between bond yield and loan covenants is stronger when bond holding is more dispersed, for firms with higher default risk or better corporate governance as well as in the absence of relationship lenders.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000031

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