Credit Supply and Contracting on Hard Information in Debt Markets

52 Pages Posted: 16 Mar 2016 Last revised: 28 Jan 2018

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Stephen A. Karolyi

Office of the Comptroller of the Currency

Date Written: December 1, 2017

Abstract

We use fair value adoption as a quasi-natural experiment to examine the effect of hard information on credit supply through a contracting channel. After fair value adoption, usage of financial covenants depending on capital-based fair value treatments significantly declined. Capital-based covenant usage by treated borrowers in the financial sector dropped by 7.7% relative to control borrowers. They also experienced an 8.2% relative drop in credit supply, suggesting that the debt contracting space shrunk. Affected borrowers did not compensate with alternative funding sources; they decreased their own lending by 2.8%, propagating these contracting effects to the real economy.

Keywords: loan contracting, hard information, covenants, credit availability, real effects

JEL Classification: G21, G28, G32, M41

Suggested Citation

Ertan, Aytekin and Karolyi, Stephen A., Credit Supply and Contracting on Hard Information in Debt Markets (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=2747583 or http://dx.doi.org/10.2139/ssrn.2747583

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Stephen A. Karolyi (Contact Author)

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
315
Abstract Views
1,592
rank
131,800
PlumX Metrics