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
Date Written: December 24, 2021
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: Suggested Citation