Risk Management, Agency Costs, and Lending Covenants

68 Pages Posted: 15 Jan 2021 Last revised: 8 Sep 2021

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Hendrik Bessembinder

W.P. Carey School of Business

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: September 7, 2020

Abstract

We document the importance of loan covenants to observed hedging outcomes, by studying lending agreements and derivative positions of U.S. oil and gas producers. The emergence of fracking technology was accompanied by sharp increases in capital spending and borrowing. The contracts involved often include covenants specifying hedging policies, and more frequently for firms with higher expected costs of default. Firms with contractual hedging commitments have lower borrowing costs and perform better during the COVID-19 pandemic, even after controlling for hedging levels. The results imply that understanding firm’s hedging outcomes requires consideration of binding lending covenants employed to mitigate agency conflicts.

Keywords: hedging, risk management, debt, covenants, credit boom, fracking

JEL Classification: G30, G32, G21

Suggested Citation

Babenko, Ilona and Bessembinder, Hendrik (Hank) and Tserlukevich, Yuri, Risk Management, Agency Costs, and Lending Covenants (September 7, 2020). Available at SSRN: https://ssrn.com/abstract=3675898 or http://dx.doi.org/10.2139/ssrn.3675898

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Hendrik (Hank) Bessembinder

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://isearch.asu.edu/profile/2717225

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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