How Does Lender Health Affect Covenant-Violating Borrowers?
53 Pages Posted: 4 Jul 2019
Date Written: July 2, 2019
Using the Emerging Market Debt Crises of the late 1990s, a shock that directly impacted some U.S. banks but not their domestic borrowers, we study the causal impact of lender health on covenant-violating borrowers. Using difference-in-differences, we find that banks exposed to the crises become relatively more likely to be stringent with covenant violators. Such stringency has real effects, as covenant violators become more likely to suffer a distressed delisting if their lenders are crisis-exposed. We also find effects for lender health on borrower investments, but these effects are not specific to covenant-violating borrowers.
Keywords: Bank loan covenants, corporate debt structure, contingent control rights, financial distress, bank capital, bank regulation, cross-border crisis transmission
JEL Classification: G32,G31,G33,G21,G28
Suggested Citation: Suggested Citation