Borrower private information covenants and loan contract monitoring

We identify covenants in commercial loan contracts that require public borrowers to periodically disclose two types of accounting-related private information to lenders: projected financial statements for future periods and monthly historical financial statements. We hypothesize and provide evidence...

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Bibliographic Details
Published in:Journal of accounting & economics 2017-11, Vol.64 (2-3), p.313-339
Main Authors: Carrizosa, Richard, Ryan, Stephen G.
Format: Article
Language:English
Subjects:
Debt contracting
Debt covenants
Loan monitoring
Private information
Relationship lending
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Summary:We identify covenants in commercial loan contracts that require public borrowers to periodically disclose two types of accounting-related private information to lenders: projected financial statements for future periods and monthly historical financial statements. We hypothesize and provide evidence that: (1) loan contracts include these covenants in settings where they enhance lenders’ loan contract monitoring; (2) the covenants are positively associated with the frequency of loan contract amendments; and (3) lenders trade on the borrower private information they receive in secondary loan markets. We further show that the two types of covenants have predictably different determinants and effects.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2017.05.004