Investment Sensitivity to Lender Default Shocks

78 Pages Posted: 5 Apr 2020 Last revised: 20 Dec 2021

See all articles by Hursit S. Celil

Hursit S. Celil

Peking University - HSBC Business School

Brandon Julio

Lundquist College of Business, University of Oregon

Srinivasan Selvam

Peking University - HSBC Business School

Date Written: March 10, 2020

Abstract

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

Celil, Hursit S. and Julio, Brandon and Selvam, Srinivasan, Investment Sensitivity to Lender Default Shocks (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3552116 or http://dx.doi.org/10.2139/ssrn.3552116

Hursit S. Celil

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China
+8675526033096 (Phone)

Brandon Julio (Contact Author)

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Srinivasan Selvam

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

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