The Effect of Bank Monitoring on Public Bond Terms

49 Pages Posted: 5 Mar 2018 Last revised: 25 Nov 2018

See all articles by Zhiming Ma

Zhiming Ma

Peking University

Derrald Stice

University of Hong Kong - Faculty of Business and Economics; HKU - Accounting Area - Faculty of Business and Economics

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Date Written: November 22, 2018

Abstract

This study examines the effect of bank loan monitoring on public bond contract design. We find that bond yield spreads are lower and that bond issuance amounts are larger when a borrower has recently obtained a private loan, consistent with bond issuers benefiting from the screening and ongoing monitoring of banks. We find, however, that these bonds include more covenants than bonds issued without the cross-monitoring of banks, consistent with bondholders wanting to protect themselves from private lenders. This effect is larger for firms with high information asymmetry and larger potential conflicts between different lender types. Our results are robust to a battery of sensitivity tests. Overall, our empirical results suggest that borrowers that precede their public bond issuances with private loan agreements receive more favorable bond terms; however, these benefits are associated with the cost of increased monitoring by public bonds.

Keywords: Debt contracting, Public bonds, Private loans, Bank monitoring

JEL Classification: G10, G21, M41

Suggested Citation

Ma, Zhiming and Stice, Derrald and Williams, Christopher D., The Effect of Bank Monitoring on Public Bond Terms (November 22, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3129216

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Derrald Stice (Contact Author)

University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong, HK
China

HKU - Accounting Area - Faculty of Business and Economics ( email )

Hong Kong

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

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