The effect of bank monitoring on public bond terms

Zhiming Ma, Derrald Stice and Christopher Williams

Journal of Financial Economics, 2019, vol. 133, issue 2, 379-396

Abstract: This study examines the effect of bank loan monitoring on public bond contract design. We find that bond yield spreads are lower and that bond issuance amounts are larger when a borrower has recently obtained a private loan, consistent with bond issuers benefiting from the screening and ongoing monitoring of banks. We find that these bonds include more covenants than bonds issued without the cross-monitoring of banks, consistent with bondholders wanting to protect themselves from private lenders. This effect is larger for firms with high information asymmetry and larger potential conflicts between different lender types. Our results are robust to a battery of sensitivity tests. Overall, our empirical results suggest that borrowers that precede their public bond issuances with private loan agreements receive more favorable bond terms. Meanwhile, these benefits are associated with the cost of increased monitoring by public bonds.

Keywords: Debt contracting; Public bonds; Private loans; Bank monitoring (search for similar items in EconPapers)
JEL-codes: G10 G21 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X1930025X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:133:y:2019:i:2:p:379-396

DOI: 10.1016/j.jfineco.2019.02.003

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().