The Role of Bank Monitoring in Borrowers’ Discretionary Disclosure: Evidence from Covenant Violations

Abstract

This study uses covenant violations to provide evidence on how firms make disclosure decisions in the presence of enhanced bank monitoring. Using a regression discontinuity design, I find that firms reduce disclosure following covenant violations. A series of analyses suggest that part of this decline in disclosure reflects a delegation of monitoring to banks by shareholders who consequently demand less disclosure.

Keywords: disclosure, banks, corporate governance, covenant violation, control rights

JEL Classification: M40, G21, G32, D82