Lending Relationships When Creditors are in Control

71 Pages Posted: 13 Feb 2018 Last revised: 26 Jan 2023

See all articles by Jan Keil

Jan Keil

Humboldt University of Berlin

Date Written: October 31, 2022

Abstract

Violations of financial covenants shift control rights to lenders. When borrowers have lending relationships with these lenders in control, they experience not only smaller declines in investment, but also lesser deteriorations in both firm survival probabilities and in sales. These effects are largely driven by opaque borrowers without any credit ratings. They are present where lending relationships existed already before loan issuance (ex-ante), but also where a contractual relationship without pre-issuance interaction is more mature (ex-post). Surprisingly, there is no evidence of any “dark side” of lending relationships when creditors are in control, such as an increase in interest expenses or a lesser degree of financial discipline.

Keywords: Relationship banking, covenant violations, regression discontinuity

JEL Classification: G20,G21

Suggested Citation

Keil, Jan, Lending Relationships When Creditors are in Control (October 31, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3109202

Jan Keil (Contact Author)

Humboldt University of Berlin ( email )

Dorotheenstrasse 1
Berlin, 10099
Germany

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

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