Senior Lender Control: Monitoring Spillover or Creditor Conflict?

52 Pages Posted: 19 Jul 2016 Last revised: 2 May 2018

See all articles by Bo Li

Bo Li

Tsinghua University - PBC School of Finance

Lynnette D. Purda

Queen's University - Smith School of Business

Wei Wang

Queen's University - Smith School of Business

Date Written: January 20, 2018

Abstract

This paper studies the effect of senior lender control, as measured by bank loan covenants, on the pricing of new bond issues. We find a U-shaped relation between the number of financial covenants on a firm’s loan contract and the bond yield spread. Our results suggest that bondholders initially value the monitoring benefits derived from loan covenants; as lender control becomes excessive, however, bondholders require compensation for the risk of losses due to creditor conflicts. Our heterogeneity tests show that the positive relation between bond yield and loan covenants is stronger when bondholding is more dispersed but is weaker for firms with lower default risk or weaker corporate governance as well as in the presence of relationship lenders.

Keywords: delegated monitoring, creditor conflict, lender control rights, loan covenants, corporate bonds

JEL Classification: G30, G33, G34

Suggested Citation

Li, Bo and Purda, Lynnette D. and Wang, Wei, Senior Lender Control: Monitoring Spillover or Creditor Conflict? (January 20, 2018). Available at SSRN: https://ssrn.com/abstract=2811054 or http://dx.doi.org/10.2139/ssrn.2811054

Bo Li (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
+86 10-627982146 (Phone)

Lynnette D. Purda

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada
613-533-6980 (Phone)

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
101
Abstract Views
779
rank
273,181
PlumX Metrics