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Lender Forbearance

46 Pages Posted: 30 Jun 2017  

Andrew Bird

Carnegie Mellon University

Aytekin Ertan

London Business School

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business

Thomas G. Ruchti

Carnegie Mellon University - David A. Tepper School of Business

Date Written: June 29, 2017

Abstract

We use a regression discontinuity design to study ex-post discretion in lender’s contractual enforcement of restrictive covenant violations. At pre-set thresholds, we find that lenders enforce contractual breaches at an 11% rate, varying between 5% and 18% and peaking when credit conditions are tightest, consistent with enforcement exacerbating credit cycles. Costly coordination reduces enforcement; increasing the number of lenders required to vote for enforcement action by one reduces the enforcement propensity by 6.3%. Enforcement is less frequent for borrowers with easy access to external financing and for well-reputed lead arrangers, suggesting that optimal enforcement depends on endogenous matching.

Keywords: contract enforcement, financial covenants, credit cycles, external financing, reputation, creditor coordination

JEL Classification: G21, G32, K12, L14, E32, E44

Suggested Citation

Bird, Andrew and Ertan, Aytekin and Karolyi, Stephen A. and Ruchti, Thomas G., Lender Forbearance (June 29, 2017). Available at SSRN: https://ssrn.com/abstract=2995224

Andrew Bird (Contact Author)

Carnegie Mellon University ( 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 Karolyi

Carnegie Mellon University - David A. Tepper School of Business ( email )

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

Thomas Ruchti

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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