Investment Sensitivity to Lender Default Shocks
78 Pages Posted: 5 Apr 2020 Last revised: 20 Dec 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 more pronounced when agency problems with creditors like asset substitution and claim dilution are higher. Moreover, the decline in investment is not attributable to more frequent covenant violations or to market conditions. The evidence highlights the role of supply-side frictions through the asset side of lenders' balance sheets on corporate investment and how agency problems may act as mechanisms.
Keywords: Creditor rights, Corporate investment policy, Financing frictions, Asset Substitution, Claim Dilution
JEL Classification: E22, G21, G31, G32, G33
Suggested Citation: Suggested Citation