Abstract

http://ssrn.com/abstract=5529
 
 

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Covenants and Collateral as Incentives to Monitor


Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Andrew Winton


University of Minnesota - Twin Cities - Carlson School of Management

July 1994


Abstract:     
Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do so. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make the effective maturity of a loan contingent on monitoring by the lender. The ability to secure a loan makes the effective priority of the loan contingent on monitoring by the lender. Thus both covenants and collateral can be motivated as contractual devices that increase a lender's incentive to monitor. These results are consistent with a number of stylized facts about the use of covenants and collateral in bank lending.

JEL Classification: G21

working papers series


Not Available For Download

Date posted: September 19, 1994  

Suggested Citation

Rajan, Raghuram G. and Winton, Andrew, Covenants and Collateral as Incentives to Monitor (July 1994). Available at SSRN: http://ssrn.com/abstract=5529

Contact Information

Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
Andrew Winton (Contact Author)
University of Minnesota - Twin Cities - Carlson School of Management ( email )
321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)
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