Investment sensitivity to lender default shocks

Hursit S. Celil, Brandon Julio and Srinivasan Selvam

Journal of Corporate Finance, 2023, vol. 79, issue C

Abstract: We investigate how lender default shocks impact corporate investment. Lenders with recent default experience write stricter loan contracts, especially to borrowers with pre-existing relationships, leading to a reduction in real investment for all borrowing firms. The decline in investment is more pronounced when agency problems with creditors like asset substitution and claim dilution are higher. Moreover, the decline in investment is not attributable to more frequent covenant violations or to market conditions. The evidence highlights the role of supply-side frictions through the asset side of lenders’ balance sheets on corporate investment and how agency problems may act as mechanisms.

Keywords: Creditor rights; Corporate investment; Financing frictions; Asset substitution; Claim dilution (search for similar items in EconPapers)
JEL-codes: E22 G21 G31 G32 G33 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:79:y:2023:i:c:s0929119922001547

DOI: 10.1016/j.jcorpfin.2022.102311

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