What’s My Style? Supply-Side Determinants of Debt Covenant Inclusion

Journal of Business Finance & Accounting, Forthcoming

54 Pages Posted: 12 May 2021 Last revised: 4 Jan 2022

See all articles by Zhiming Ma

Zhiming Ma

Peking University

Derrald Stice

The University of Hong Kong - School of Business; HKU Business School, The University of Hong Kong

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Date Written: December 24, 2021

Abstract

We examine the supply-side determinants of debt covenants included in loan agreements. Controlling for borrower characteristics, we find evidence that the covenants that lead arranger banks include in new contracts persist into future contracts for at least three years. We document that this covenant style effect is smaller when borrowers have recently violated a debt covenant or when the loan issue amount is large, and it is larger when the costs of contracting are highest and when a borrower provides collateral. We also find that the covenant style effect decreases following changes in a bank’s CEO or CFO. Overall, our evidence is consistent with lenders’ covenant preferences arising from strategic cost-benefit analysis informed from prior lending experiences and being related to lender expertise in negotiating, monitoring, and enforcing covenants.

Keywords: Debt Contracts, Supply-Side Determinants, Debt Covenants, Banks

JEL Classification: G10, G21, M41

Suggested Citation

Ma, Zhiming and Stice, Derrald and Williams, Christopher D., What’s My Style? Supply-Side Determinants of Debt Covenant Inclusion (December 24, 2021). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3842928 or http://dx.doi.org/10.2139/ssrn.3842928

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Derrald Stice (Contact Author)

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

HKU Business School, The University of Hong Kong ( email )

Hong Kong
China

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

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