Review of Finance Vol. 30 No. 4 2026

Competition and loan contracting

Xunhua Su¹; Jin Cao^2,3; Einar C Kjenstad⁴; Xiaoyu Zhang^5,6

¹ Norwegian School of Economics , Bergen 5045, · ² Norges Bank , Bankplassen 2 , Oslo 0151, · ³ CESifo , Poschingerstrasse 5 , Munich 81679, · ⁴ School of Business and Economics, UiT, The Arctic University of Norway , Breivangvegen 23 , Tromsø 9037, · ⁵ Finance Department, Vrije Universiteit Amsterdam , De Boelelaan 1105 , Amsterdam 1181 HV, · ⁶ Tinbergen Institute

Abstract

A theoretical model of the borrower–lender relationship predicts that increased competitive threats lead to a reduction in loan covenant restrictiveness that is stronger for groups of borrowers who face constraints to their ability to raise external financing or compete in the product market. These predictions arise because competition impacts the dynamics of borrower performance so that lenders must trade off the benefit of controlling agency problems against a heightened cost of lost product market opportunities for the borrower, ultimately lowering the optimal use of covenants. We find strong empirical support for these predictions, highlighting an important role of competition for optimal financial contracting rooted in underlying agency problems.

DOI

10.1093/rof/rfaf054

Volume

30

Issue

4

Pages

1187-1225

Language

en

Sources

crossref

Cite

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