Why do loans contain covenants? Evidence from lending relationships

Robert Prilmeier

Journal of Financial Economics, 2017, vol. 123, issue 3, 558-579

Abstract: Despite the importance of banks’ role as delegated monitors, little is known about how non-price terms of loan contracts are structured to optimize information production in a lending relationship. Using a large sample of corporate loans, this paper examines the effect of relationship lending on covenant choice. Consistent with information asymmetry theories, covenant tightness is relaxed over the duration of a relationship, especially for opaque borrowers. In contrast, the effect of lending relationship intensity on the number of covenants included in a loan follows an inverted U shape. I discuss potential explanations for this finding.

Keywords: Relationships; Banking; Covenants; Information asymmetries; Monitoring incentives (search for similar items in EconPapers)
JEL-codes: D82 G21 G30 G32 L14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (45)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:123:y:2017:i:3:p:558-579

DOI: 10.1016/j.jfineco.2016.12.007

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