Short-Termism Spillovers from the Financial Industry

Andrew Bird, Aytekin Ertan, Stephen A Karolyi and Thomas Ruchti

The Review of Financial Studies, 2022, vol. 35, issue 7, 3467-3524

Abstract: To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism to spill over to their borrowers. We find that short-termist lenders are significantly more likely to enforce covenant breaches. This behavior is pronounced when performance benchmarks are precise or salient, and when managers have high pay-performance sensitivity, but not when they face strong shareholder governance. Affected borrowers are more likely to switch lenders, pay higher spreads on renegotiated loans, and reduce investment. Our findings suggest that bank managers trade off relationship capital for income-boosting fees and term changes from covenant enforcement to meet earnings benchmarks.

JEL-codes: G21 G28 G32 M41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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