Waiving Technical Default: The Role of Agency Costs and Bank Regulations
Posted: 4 May 2005
Date Written: March 2005
In this study, I examine characteristics of both banks and borrowers to determine whether any of these characteristics are associated with banks' decisions to waive violations of debt covenants. Starting with a sample of firms, which violated their bank debt, the study investigates whether the bank's waiver decision varies with the banks characteristics, debt features, and borrowers' moral hazard and adverse selection costs. The findings suggest that the waiver decision is associated with borrowers' and debts' agency costs. The results also indicate that bank regulation and financial characteristics are important factors in the waiver decision process. Finally, the results find no evidence that syndicated loans, bank structure, and adverse economic condition are significant determinants of the waiver decision. These results should be of interest to bank managers as they evaluate whether to waive technical default and for financial analysts as they predict the impact of the waiver on stock prices.
Keywords: Debt covenants, Covenant Violation, Technical default, Moral hazard and Adverse
JEL Classification: G21, G25, G39, M41, M43
Suggested Citation: Suggested Citation