2020/11/13 by Andrew Bird, Aytekin Ertan, Stephen A. Karolyi +2 · 21 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Business #Competition (biology) #Discretion #Economics #Enforcement #Ex-ante #Finance #Forbearance #Housing Market and Economics #Islamic Finance and Banking Studies #Law #Monetary economics
paper · open access · doi:10.1017/s0022109020000836
published in Journal of Financial and Quantitative Analysis 57(1), 207-239 (Cambridge University Press)
openalex publication_date 2020/11/13 · openalex created_date 2022/05/12 · openalex updated_date 2026/07/02
Abstract We use a threshold-based design to study ex post discretion in lenders’ contractual enforcement of covenant violations. At preset thresholds, lenders enforce contractual breaches only infrequently, but this enforcement is associated with material consequences (e.g., fees and renegotiations). Enforcement varies significantly over time and peaks when credit conditions are tightest, indicating that enforcement is procyclical. Costly coordination reduces enforcement: Syndicates with ex ante restrictive voting requirements enforce at lower rates. Consistent with theories of lender competition and implicit contracting, enforcement rates are lower for borrowers with access to alternative sources of financing and well-reputed lead arrangers.