Economics, Econometrics and Finance
3 years ago

Financial shocks to lenders lead to stricter loan covenants for borrowers.

Journal of Accounting and Economics
Financial shocks to lenders and the composition of financial covenants
Hans Bonde Christensen, Daniele Macciocchi, Arthur Morris, Valeri V. Nikolaev

Paper Summary

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Financial shocks to lenders impact the rules in loan contracts. Lenders add more strict rules about how well the borrower must perform, but not about how much money they must have. This happens when lenders face problems with their own money or when they learn new things about how to pick good borrowers. This shows that lenders' preferences affect how loans are set up.