Interplay of Shareholder Monitoring and Loan Contracting: Theory and Evidence

38 Pages Posted: 20 Aug 2016

See all articles by Tao Chen

Tao Chen

Nanyang Business School, Nanyang Technological University

Yu Jin

Shanghai University of Finance and Economics

Le Zhang

Australian National University (ANU) - College of Business and Economics

Date Written: June 16, 2016

Abstract

We model and empirically test the interplay of shareholder monitoring and loan contracting. In our model, to avoid a decrease in its expected pledgeable income, a firm substitutes loan covenants for shareholder (fund manager) monitoring and the substitution effect is stronger among riskier firms. In addition, our model predicts that cost of debt increases and future lending relationship deteriorates following a decrease in shareholder monitoring. Using data from U.S. syndicated loan market and a seemingly exogenous measure of shareholder monitoring, we find results consistent with our theory predictions. Moreover, our primary empirical findings hold when the Russel index reconstitutions is used to instrument for the shareholder monitoring measure.

Keywords: Shareholder monitoring, loan contracting

JEL Classification: G12, G32

Suggested Citation

Chen, Tao and Jin, Yu and Zhang, Le, Interplay of Shareholder Monitoring and Loan Contracting: Theory and Evidence (June 16, 2016). 29th Australasian Finance and Banking Conference 2016, Available at SSRN: https://ssrn.com/abstract=2826480

Tao Chen

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Yu Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Le Zhang (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

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