56 Pages Posted: 26 Oct 2016 Last revised: 8 Jul 2017
Date Written: June 2017
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: Suggested Citation
Bird, Andrew and Ertan, Aytekin and Karolyi, Stephen A. and Ruchti, Thomas G., Short-Termism Spillovers from the Financial Industry (June 2017). Available at SSRN: https://ssrn.com/abstract=2859169