Bank Relationship, Covenant Enforcement, and Creditor Control

67 Pages Posted: 26 Nov 2019

See all articles by Yong Kyu Gam

Yong Kyu Gam

Institute of Financial Studies, Southwestern University of Finance and Economics

Chunbo Liu

Institute of Financial Studies, Southwestern University of Finance and Economics

Date Written: October 2019

Abstract

This paper investigates the effect of banking relationship on the likelihood of lenders’ enforcement of loan covenant violations. We find that if lenders have a long-run relationship with borrowers, these lenders enforce material covenant violations at a substantially lower rate when borrowers breach financial covenants. Moreover, borrowers with such relationships are less likely to experience raises in loan interest rates and a deterioration of subsequent financing and investment activities when they fail to fulfill their financial covenants. Further evidence shows that the mitigation of information asymmetry along the lending relationship is the driving force of the empirical findings.

Keywords: Bank Relationship, Covenant Violation, Loan Renegotiation

JEL Classification: G21, G32

Suggested Citation

Gam, Yong Kyu and Liu, Chunbo, Bank Relationship, Covenant Enforcement, and Creditor Control (October 2019). Available at SSRN: https://ssrn.com/abstract=3486614 or http://dx.doi.org/10.2139/ssrn.3486614

Yong Kyu Gam (Contact Author)

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

55 Guanghuacun St
Chengdu, Sichuan 610074
China

Chunbo Liu

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

55 Guanghuacun Street
Qingyang area
Chengdu, Sichuan 610074
China

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