| Popis: |
Evidence of the effect of lender capital management incentives on debt contract design is sparse. We examine whether regulatory capital adequacy, a first-order concern for banks, is associated with the strictness of financial covenants included in loan contracts. We provide evidence that lenders with lower regulatory capital issue loans with lower financial covenant strictness. This is consistent with lenders viewing borrower covenant violations as costlier to lenders when their regulatory capital is relatively low. Consistent with lenders loosening covenants that are more likely to lead to frequent transfers of control, we find that this association is concentrated in performance covenants, as opposed to capital covenants. We also find that capital management incentives extend to participant banks in a syndicate, where participants with relatively low capital adequacy take smaller loan shares when the lead bank sets high covenant strictness. |
