Investment Sensitivity to Lender Default Shocks
68 Pages Posted: 5 Apr 2020 Last revised: 10 Aug 2021
Date Written: March 10, 2020
We investigate how lender default shocks impact corporate investment. Lenders with recent default experience write stricter loan contracts, especially to borrowers with pre-existing relationships, leading to a reduction in real investment for all borrowing firms. The decline in investment is not attributable to loan size, loan riskiness, borrower's agency costs, the lender-borrower relationship nexus, lender capitalization, or to borrower interest rate sensitivity but is more pronounced when lenders face a greater level of uncertainty about the investment opportunities. The evidence highlights the role of supply side frictions in corporate investment and how relationship banking may facilitate it as a channel.
Keywords: Creditor rights, Corporate investment policy, Financing frictions, Corporate defaults
JEL Classification: E22, G21, G31, G32, G33
Suggested Citation: Suggested Citation