How Lender-specific Factors Affect Their Covenant Negotiation Strategies

How Lender-specific Factors Affect Their Covenant Negotiation Strategies

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This study builds upon the debt covenant and banking literature to explore the empirical relationship between bank characteristics and debt covenants. With the use of different covenant restrictiveness proxies, in addition to different model specifications, the study that bank size, credit risk, liquidity, income diversification, deposit funding, and the bank's financial stability all have significant explanatory power on covenant restrictiveness, although the significance of these variables differs depending upon the restrictiveness proxy, the sample, and the empirical methodology. Another interesting finding from this study is significance of lender and time fixed effects, which suggests that market conditions and exogenous factors have an influence over financial contracting arrangements. Overall, the study offers a new insight into determinants of covenant agreements, has implications for policymaking, and contributes to two distinct areas of financial research.

Title:How Lender-specific Factors Affect Their Covenant Negotiation Strategies
Author: Calum Crichton
Publisher: - 2015

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