Bank Interventions and Trade Credit: Evidence from Debt Covenant Violations
57 Pages Posted: 18 Aug 2014 Last revised: 7 Apr 2019
Date Written: May 4, 2018
This study examines the consequences of conflicts between creditors. Using the setting of debt covenant violations, I employ a regression discontinuity design to identify the effect of bank interventions on their borrowers' trade credit. The results show that trade credit experiences a substantial decline when banks intervene in the borrowing firm following covenant violations. The decline is mitigated by the presence of dependent suppliers and exacerbated by banks' incentives to exercise control rights. Such externalities are reflected in the loan contract design. Borrowing firms sign less restrictive loan contracts when they rely more on trade credit or trade creditors.
Keywords: Debt covenants, Loan contract, Trade credit, Creditor control rights, Suppliers, Regression discontinuity design
JEL Classification: G21, G30, G32
Suggested Citation: Suggested Citation