Interplay of Shareholder Monitoring and Loan Contracting: Theory and Evidence
38 Pages Posted: 20 Aug 2016
Date Written: June 16, 2016
We model and empirically test the interplay of shareholder monitoring and loan contracting. In our model, to avoid a decrease in its expected pledgeable income, a firm substitutes loan covenants for shareholder (fund manager) monitoring and the substitution effect is stronger among riskier firms. In addition, our model predicts that cost of debt increases and future lending relationship deteriorates following a decrease in shareholder monitoring. Using data from U.S. syndicated loan market and a seemingly exogenous measure of shareholder monitoring, we find results consistent with our theory predictions. Moreover, our primary empirical findings hold when the Russel index reconstitutions is used to instrument for the shareholder monitoring measure.
Keywords: Shareholder monitoring, loan contracting
JEL Classification: G12, G32
Suggested Citation: Suggested Citation