Bank Interventions and Trade Credit: Evidence from Debt Covenant Violations

57 Pages Posted: 18 Aug 2014 Last revised: 7 Apr 2019

See all articles by Zilong Zhang

Zilong Zhang

City University of Hong Kong

Date Written: May 4, 2018

Abstract

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

Zhang, Zilong, Bank Interventions and Trade Credit: Evidence from Debt Covenant Violations (May 4, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2482249 or http://dx.doi.org/10.2139/ssrn.2482249

Zilong Zhang (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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