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Loan Covenants in Private Debt Contracts
thesis
posted on 19.07.2018, 00:39 by JESSLYN QIAN HUI LIMThis dissertation conducts an empirical exploration of covenants in private debt contracting. It provides evidence that covenant violations increase borrowing costs on subsequent loan contracts. The results indicate that lenders’ dual loan and equity ownership in the borrowing firm helps align interest, reduces the need to monitor via covenants, and relaxes loan contract terms. The analyses also suggest that corporate boards with a higher proportion of directors appointed after the CEO assumed office are associated with weaker internal monitoring hence tighter loan terms. The findings emphasise the importance of covenants as tools to protect lenders against borrowers’ moral hazard behaviour.