The Supply‐Side Determinants of Loan Contract Strictness
Year: 2012
Type: article
Abstract: ABSTRACT Using a measure of contract strictness based on the probability of a covenant violation, I investigate how lender‐specific shocks impact the strictness of the loan contract that a borrower receives. Banks write tighter contracts than their peers after suffering payment defaults to their own loan portfolios, even when defaulting borrowers are in different industries and geographic regions from the current borrower. The effects persist after controlling for bank capitalization, although bank equity compression is also associated with tighter contracts. The evidence suggests that recent defaults inform the lender's perception of its own screening ability, thereby impacting its contracting behavior.
Source: The Journal of Finance
Author: JUSTIN MURFIN
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3122332694