Evidence on the Determinants and Economic Consequences of Delegated Monitoring
61 Pages Posted: 10 Sep 2011
Date Written: August 22, 2011
We investigate delegated monitoring by examining the determinants and effects of including cross-acceleration provisions in public debt contracts. We find that cross-acceleration provision use depends on borrowers’ going concern relative to liquidation values, debt repayment structures, credit quality, and financial reporting quality. This suggests that the use of cross-acceleration provisions increases when the costs of cascading defaults are lower, the conflicts between creditor classes are higher, and the benefits of delegating monitoring to banks are higher. We also find a lower interest rate on public debt contracts with cross-acceleration provisions, but the rate reduction depends on borrowers’ financial reporting quality.
Keywords: cross monitoring, cross-acceleration provisions, debt covenants, accounting quality
JEL Classification: G30, M40
Suggested Citation: Suggested Citation