This paper examines the dynamic allocation of control rights in private debt contracts of firms. We show that a covenant violation in the prior loan contract implies a stigma for borrowers which results in stricter loan contract terms in subsequent new loan contracts. Our analyses reject potentially other explanations such as firm characteristics or agency problems between the lender and firm management, shareholders or public debtholders. After covenant violations in the prior contract, new loans have on average 18bps higher spreads and include more of those covenant types which also have been violated in the prior contract, with tighter thresholds.

We analyze pricing differences between U.S. and European syndicated loans over the 1992–2014 period. We explicitly distinguish credit lines from term loans. For credit lines, U.S. borrowers pay significantly higher spreads, but lower fees, resulting in similar total costs of borrowing in both markets. Credit line usage is more cyclical in the United States, which provides a rationale for the pricing structure difference. For term loans, we analyze the channels of the cross-country loan price differential and document the importance of: the composition of term loan borrowers and the loan supply by institutional investors and foreign banks. Received September 18, 2015; editorial decision July 13, 2016 by Editor Philip Strahan.