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Bank loan covenants, lending relationships and covenant violations
thesisposted on 2022-03-28, 11:23 authored by Yi Zheng
Using a large sample of U.S. corporate bank loans, we investigate the influence of lending relationships on loan covenants and covenant violations. Consistent with the information asymmetry argument, we find that lending relationships substitute for financial covenants in loan contracts. In addition, the effect of lending relationship intensity on the total number of financial covenants included in a loan package is U-shaped. It appears that lending relationship intensity acts as an indicator of covenant violations. Specifically, an increasing lending relationship intensity decreases the likelihood of covenant violations, but relationship borrowers who have access to the public debt market or are of a large size in their industry are subject to a high probability of covenant violations. Overall, relationship borrowers with different levels of relationship intensity and financing capacity are subject to a distinct probability of covenant violations.