Investment Sensitivity to Lender Default Shocks

68 Pages Posted: 5 Apr 2020 Last revised: 10 Aug 2021

See all articles by Hursit Celil

Hursit 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 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

Celil, Hursit 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 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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