Journal of Financial Economics Vol. 123 No. 3 2017
Why do loans contain covenants? Evidence from lending relationships
Abstract
Despite the importance of banks’ role as delegated monitors, little is known about how non-price terms of loan contracts are structured to optimize information production in a lending relationship. Using a large sample of corporate loans, this paper examines the effect of relationship lending on covenant choice. Consistent with information asymmetry theories, covenant tightness is relaxed over the duration of a relationship, especially for opaque borrowers. In contrast, the effect of lending relationship intensity on the number of covenants included in a loan follows an inverted U shape. I discuss potential explanations for this finding.
- DOI
- 10.1016/j.jfineco.2016.12.007
- Volume
- 123
- Issue
- 3
- Pages
- 558-579
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref