Lender Forbearance

46 Pages Posted: 30 Jun 2017

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

Government of the United States of America - Office of Financial Research

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, Lender Forbearance (June 29, 2017). Available at SSRN: https://ssrn.com/abstract=2995224 or http://dx.doi.org/10.2139/ssrn.2995224

Andrew Bird (Contact Author)

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, London NW1 4SA
United Kingdom
00442070008131 (Phone)

HOME PAGE: http://www.aytekinertan.com

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Thomas Ruchti

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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