Spillovers From Creditor Control

39 Pages Posted: 9 Nov 2016 Last revised: 4 Jan 2021

Date Written: December 19, 2020

Abstract

A loan covenant violation may be informative to parties outside of the lender-firm pair that agreed to the covenant term. This implies externalities of lender monitoring. I find that a firm's covenant violation yields spillover effects both to other violators and to non-violators in the firm's industry. Covenant violators have ex post renegotiation outcomes that depend upon rival firm violation. This suggests that violation by peers informs the optimal renegotiation outcome following covenant violation. Non-violators benefit competitively from peer violation. Average spillover effects amount to between 8% to 60% of the direct effect, depending on the outcome studied.

Keywords: SUTVA, hierarchical matching, loan covenants, spillover effects

JEL Classification: G31, G32, G21

Suggested Citation

Nordlund, James, Spillovers From Creditor Control (December 19, 2020). Available at SSRN: https://ssrn.com/abstract=2866505 or http://dx.doi.org/10.2139/ssrn.2866505

James Nordlund (Contact Author)

Louisiana State University ( email )

2163 CEBA
Baton Rouge, LA 70803
United States

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