Short-Termism Spillovers from the Financial Industry

54 Pages Posted: 26 Oct 2016 Last revised: 11 Jan 2017

Andrew Bird

Carnegie Mellon University - Tepper School of Business

Aytekin Ertan

London Business School

Stephen A. Karolyi

Carnegie Mellon University - Tepper School of Business

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business

Date Written: January 1, 2017

Abstract

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism incentives to spill over into the corporate sector. We find that lenders with short-termism incentives enforce material covenant violations at abnormally high rates. Further, they are more likely to target high-quality borrowers with which they have a prior relationship and that are less financially constrained. Affected borrowers are more likely to switch lenders, receive worse loan terms on future loans, and reduce investment. Market reactions to announcements of material covenant violations when lenders have short-term incentives are 0.88% lower, suggesting that short-termism spillovers are value-decreasing.

Keywords: lending, short-termism, covenants, monitoring, spillovers, real effects

JEL Classification: G21, G28, G32, M41

Suggested Citation

Bird, Andrew and Ertan, Aytekin and Karolyi, Stephen A. and Ruchti, Thomas G., Short-Termism Spillovers from the Financial Industry (January 1, 2017). Available at SSRN: https://ssrn.com/abstract=2859169

Andrew Bird

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Aytekin Ertan

London Business School ( email )

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

Stephen A. Karolyi

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
4122682909 (Phone)

Thomas G. Ruchti (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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