Lender Capital Management and Financial Covenant Strictness

• 成果类型: Article
• 署名作者: Demerjian, Peter R.; Owens, Edward L.; Sokolowski, Matias
• 署名单位: University System of Georgia; Georgia State University; Utah System of Higher Education; University of Utah; University of New Mexico
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/TAR-2020-0346
• 发表日期: 2023
• 页码: 149-172
• 关键词: CONTROL RIGHTS; BANK; earnings; IMPACT; firm

摘要

We provide evidence that lenders with lower regulatory capital issue loans with lower financial covenant strictness, consistent with such lenders viewing borrower covenant violations as costlier. This is because a borrower covenant violation may lead the lender to downgrade the loan, which triggers accounting that further reduces regulatory capital. Because of regulatory scrutiny, this is true even if the lender waives the violation. We find that this association is concentrated in performance covenants rather than capital covenants. We also find that lenders with relatively low capital issue loans with lower amounts and shorter maturities, consistent with such lenders replacing covenant protection with stricter loan terms on other dimensions. Finally, we find that this form of lender capital management extends to loan syndicate participant lenders, in that participants with relatively low capital adequacy take smaller loan shares when the lead arranger sets high covenant strictness.