Crime and covenants

Farhan Shazia

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: Crime is a major concern in the U.S., with implications for the allocation of resources due to the uncertainty associated with it. This paper examines whether the U.S. state property crime rate is a source of uncertainty that induces lenders to increase and tighten covenants as a result of increased risk. I found that greater crime exposure by borrowers leads lenders to impose higher and tighter covenants. The results remain robust to various covenant intensity measures and are not driven by endogeneity. A difference-in-difference test shows that a firm's relocation to a higher-crime-prone state significantly increases covenant intensity. I explore two potential channels that drive the effect of property crime: earnings volatility and reduced collateral value of firms operating in crime-ridden states. I find that covenants and spreads are complementary factors in the presence of higher property crimes.

Keywords: Covenant intensity; Covenant tightness; Property crime (search for similar items in EconPapers)
JEL-codes: D81 G21 G30 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002266

DOI: 10.1016/j.irfa.2024.103294

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