Short-Termism Spillovers from the Financial Industry
63 Pages Posted: 26 Oct 2016 Last revised: 5 Jul 2019
Date Written: January 4, 2018
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 higher rates. Further, they target relatively higher quality borrowers with which they have a prior relationship and that are less financially constrained. Affected borrowers switch lenders more frequently, 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 for borrowers.
Keywords: lending, short-termism, covenants, monitoring, spillovers, real effects
JEL Classification: G21, G28, G32, M41
Suggested Citation: Suggested Citation