Short-Termism Spillovers from the Financial Industry

63 Pages Posted: 26 Oct 2016 Last revised: 5 Jul 2019

See all articles by Andrew Bird

Andrew Bird

Chapman University - The George L. Argyros School of Business & Economics

Aytekin Ertan

London Business School

Stephen A. Karolyi

Office of the Comptroller of the Currency

Thomas Ruchti

Carnegie Mellon University - Department of Accounting

Date Written: January 4, 2018

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 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

Bird, Andrew and Ertan, Aytekin and Karolyi, Stephen A. and Ruchti, Thomas, Short-Termism Spillovers from the Financial Industry (January 4, 2018). Available at SSRN: https://ssrn.com/abstract=2859169 or http://dx.doi.org/10.2139/ssrn.2859169

Andrew Bird

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Aytekin Ertan

London Business School ( email )

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

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Thomas Ruchti (Contact Author)

Carnegie Mellon University - Department of Accounting ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

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