This paper examines whether lenders' risk preferences explain the use of cost‐synergy adjustments in loan contracts. These adjustments represent an aggressive accounting choice that permits borrowers to add expected cost savings and synergy gains from mergers, acquisitions, and restructurings to contractual earnings. Using novel data from loan contracts, I first document an increasing prevalence of these adjustments over the past two decades. Consistent with the notion that these adjustments provide borrowers with greater risk‐taking flexibility and increase the riskiness of lenders' payoffs, I find that lenders with stronger risk‐taking preferences are more likely to use these adjustments. This finding is more pronounced when lenders face lower monitoring costs and when borrowers are led by managers who are less risk‐incentivized. It is also stronger in loan contracts that grant borrowers more flexibility through these adjustments and when lenders face greater pressure to reach for yield. Overall, my findings highlight the importance of lenders' risk preferences in determining accounting choices in debt contracting.

This paper examines whether and how public environmental enforcement affects private lenders’ monitoring efforts and the effectiveness of such monitoring. We capture lender monitoring using environmental covenants in loan agreements. Consistent with the prediction that stringent public environmental enforcement increases lenders’ monitoring incentives, we find that in the presence of higher environmental regulatory enforcement intensity, lenders are more likely to use environmental covenants when lending to polluting borrowers and when the loans are secured by real property collateral. Moreover, consistent with the prediction that stringent public environmental enforcement facilitates lender monitoring, we find that environmental covenants are more effective in reducing borrowers’ toxic chemical releases when environmental regulatory enforcement is stronger. Taken together, our findings corroborate the importance of public environmental enforcement in inducing lenders’ monitoring efforts, as well as the joint role of public enforcement and private lender monitoring in curbing corporate pollution.