Relationship lending and bank loan covenant violations

Xu Chong Bo, Wenyi Li, Jing Shi, Yi Zheng and Qing Zhou

Accounting and Finance, 2021, vol. 61, issue 4, 5847-5878

Abstract: We examine the association between relationship lending and the likelihood of bank loan covenant violations. We find that relationship lending reduces the probability of ex‐post covenant violations. The length of the lending relationships has an inverted U‐shaped effect on the likelihood of covenant violations. The borrowers and lenders both benefit from relationship lending, but long‐term lending relationships weaken the borrower's bargaining power.

Date: 2021
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https://doi.org/10.1111/acfi.12778

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