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Hold-Up and the Use of Performance-Sensitive Debt

Tim R. Adam and Daniel Streitz

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We examine whether performance-sensitive debt (PSD) is used to reduce hold-up problems in long-term lending relationships. We find that the use of PSD is more common in the presence of a long-term lending relationship and if the borrower has fewer financing alternatives available. In syndicated deals, however, the presence of a relationship lead arranger reduces the use of PSD, which is consistent with hold-up being of lesser concern in such cases. Further, supporting our hypothesis that hold-up concerns motivate the use of PSD, we find a substitution effect between the use of PSD and the tightness of financial covenants.

Keywords: Performance-sensitive debt; relationship lending; hold-up; holdout; syndicated debt; covenants (search for similar items in EconPapers)
JEL-codes: G21 G31 G32 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-hrm
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Journal Article: Hold-up and the use of performance-sensitive debt (2016) Downloads
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