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Review of Financial Studies Vol. 35 No. 7 2022

Short-Termism Spillovers from the Financial Industry

Andrew Bird1; Aytekin Ertan2; Stephen A. Karolyi3; Thomas Ruchti4

1 Argyros School of Business and Economics, Chapman University · 2 London Business School · 3 Office of the Comptroller of the Currency, Department of the Treasury · 4 Tepper School of Business, Carnegie Mellon University ,

Abstract

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism to spill over to their borrowers. We find that short-termist lenders are significantly more likely to enforce covenant breaches. This behavior is pronounced when performance benchmarks are precise or salient, and when managers have high pay-performance sensitivity, but not when they face strong shareholder governance. Affected borrowers are more likely to switch lenders, pay higher spreads on renegotiated loans, and reduce investment. Our findings suggest that bank managers trade off relationship capital for income-boosting fees and term changes from covenant enforcement to meet earnings benchmarks.

DOI
10.1093/rfs/hhab108
Volume
35
Issue
7
Pages
3467-3524
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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