Financial Shocks to Lenders and the Composition of Financial Covenants

57 Pages Posted: 5 Dec 2017 Last revised: 10 Jun 2021

See all articles by Hans Bonde Christensen

Hans Bonde Christensen

University of Chicago - Booth School of Business

Daniele Macciocchi

University of Miami Herbert Business School

Arthur Morris

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: November 29, 2017

Abstract

We provide evidence that financial shocks to lenders influence the composition of financial covenants in debt contracts. Using two distinct measures of lender-specific shocks—defaults in a lender’s corporate loan portfolio that occur outside the borrower’s region and industry, and non-corporate loan delinquencies—we show that lenders respond to financial shocks by increasing the number and strictness of performance-based but not of capital-based covenants in debt contracts. We examine two possible channels for this result. We find evidence consistent with lenders using stricter control rights because of concerns about capital depletion (a capital channel) and because of new information about lenders’ own screening ability (a learning channel). Our results indicate that lender preferences influence how accounting information is used in debt contracts.

Keywords: accounting-based covenants, debt contracting, financial market frictions

JEL Classification: M4, G32

Suggested Citation

Christensen, Hans Bonde and Macciocchi, Daniele and Morris, Arthur and Nikolaev, Valeri V., Financial Shocks to Lenders and the Composition of Financial Covenants (November 29, 2017). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3079996 or http://dx.doi.org/10.2139/ssrn.3079996

Hans Bonde Christensen

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Daniele Macciocchi (Contact Author)

University of Miami Herbert Business School ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States

Arthur Morris

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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