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Lender Forbearance

Published online by Cambridge University Press:  13 November 2020

Andrew Bird ,
Aytekin Ertan ,
Stephen A. Karolyi  and
Thomas G. Ruchti Open the ORCID record for Thomas G. Ruchti [Opens in a new window]
Andrew Bird
Affiliation:
Carnegie Mellon University Tepper School of Businessapmb@andrew.cmu.edu
Aytekin Ertan
Affiliation:
London Business Schoolaertan@london.edu
Stephen A. Karolyi
Affiliation:
Carnegie Mellon University Tepper School of Businessskarolyi@andrew.cmu.edu
Thomas G. Ruchti*
Affiliation:
Carnegie Mellon University Tepper School of Business
*
ruchti@andrew.cmu.edu (corresponding author)
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 1 , February 2022 , pp. 207 - 239
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Steven Baker, Allen Berger, Sreedhar Bharath (discussant), David Chapman, Zhaohui Chen, Anthony Falato (the referee), Eli Fich, Mike Gallmeyer, Kris Gerardi (discussant), Yadav Gopalan (discussant), John Graham, Rawley Heimer, Christoph Herpfer, Michael Hertzel, Adam Kolasinski (discussant), Alice Liu (discussant), Marc Lipson, Elena Loutskina, Song Ma, Will Mann, Ralf Meisenzahl (discussant), Greg Nini, Matt Plosser, Michael Roberts, Adriana Robertson, Carola Schenone, Mike Schwert, Denis Sosyura, Karin Thorburn, Greg Udell, and Bill Wilhelm for excellent comments, and conference and seminar participants at the 2017 Colorado Finance Summit, the 2018 American Accounting Association Meetings, the 2018 European Finance Association Meetings, the 2018 Fixed Income and Financial Institutions Conference at the University of South Carolina, the 2018 FSU SunTrust Beach Conference, the 2018 Northern Finance Association Meetings, the 2019 American Finance Association Meetings, the 2019 Financial Management Association Meetings, and the University of Virginia.

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