• Loan interest rates increase by 13.6 basis points when lenders engage a top-tier law firm • The effect of top-tier law firms is stronger when borrowers have weak bargaining power • The effect of top-tier law firms decreases when there are more lead banks in the syndicate • Lenders engaging top-tier law firms charge higher fees and require stricter loan terms We document that top-tier law firms have a material impact on the pricing and structure of syndicated loan contracts. When lead banks engage a top-tier law firm, loan interest rates increase by 13.6 basis points, but this spread premium disappears if the borrower also uses a top-tier law firm. Our results are robust to alternative proxies for top-tier law firms and endogeneity treatment. Top-tier law firms’ ability to increase loan spreads to benefit lenders is more pronounced when borrowers have relatively weak bargaining power, and when the syndicate involves fewer lead banks. We observe that loans with top-tier law firms tend to have shorter deal completion times. In addition, lenders who engage top-tier law firms often charge higher fees and are more likely to require collateral and stricter covenants in their loan contracts. Overall, our evidence suggests top-tier law firms act in the best interest of lender clients, enabling them to negotiate more favorable pricing and terms in private debt agreements.

This study investigates how the level of board co-option might affect a borrowing firm's ex ante covenant intensity and ex post covenant violations. As the fraction of co-opted directors (those who joined the board after the CEO assumed office) increases, creditors include more covenant restrictions in their loan contracts, indicating that more co-opted boards are considered as weaker monitors. The results remain robust to various approaches accounting for endogeneity, and are not driven by alternative explanations such as CEO tenure, director inexperience, or CEO's involvement in the nominating committee. Ex post tests reveal that firms with more co-opted boards are more likely to violate loan covenants after controlling for covenant intensity. Non-co-opted independent directors appear to be the most effective monitors in mitigating covenant violations among revolving loans and loans to unrated borrowers.

Examining a sample of U.S. commercial loans originated between 1996 and 2017, we find that the propensity to employ performance pricing provisions (PPPs) in private loan contracts increases by about 10% when lenders are dual holders, that is, when they simultaneously hold equity in the borrowing firm. This finding supports the monitoring efficiency channel and is robust after accounting for the endogeneity bias from lenders’ dual holding. We also observe a substitution effect between PPP usage and covenant tightness, and the strength of this effect in dual-holder loans varies between spread-increasing and spread-decreasing PPPs. Borrowers of dual-holder loans are more likely to improve their accounting performance within one year of loan origination. These findings are consistent with dual holders’ incentive alignment role, which helps reduce monitoring costs, improve lenders’ monitoring effectiveness, and promote managerial flexibility.