Journal of Law, Finance, and Accounting > Vol 3 > Issue 2

Senior Lender Control: Monitoring Spillover or Creditor Conflict?

Bo Li, Tsinghua University, China, lib@pbcsf.tsinghua.edu.cn Lynnette Purda, Queen’s University, Canada, purdal@queensu.ca Wei Wang, Queen’s University, Canada, wwang@queensu.ca
 
Suggested Citation
Bo Li, Lynnette Purda and Wei Wang (2018), "Senior Lender Control: Monitoring Spillover or Creditor Conflict?", Journal of Law, Finance, and Accounting: Vol. 3: No. 2, pp 373-411. http://dx.doi.org/10.1561/108.00000031

Published: 21 Dec 2018
© 2018 B. Li, L. Purda and W. Wang
 
Subjects
Corporate finance: Corporate control
 
Keywords
JEL Codes: G30, G33, G34
Delegated monitoringcreditor conflictGlender control rightsloan covenantscorporate bonds
 

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In this article:
1. Introduction
2. Data Sample and Construction of Variables
3. Empirical Results
4. Conclusion
A. A Bondholders’ View of Monitoring Spillover and Creditor Conflicts Due to Senior Lender Control: A Theoretical Illustration
B. Definitions of Variables
References

Abstract

This paper studies the effect of senior lender control, as measured by bank loan covenants, on the pricing of new bond issues. We find a U-shaped relation between the number of financial covenants on a firm’s loan contract and the bond yield spread. Our results suggest that bondholders initially value the monitoring benefits derived from loan covenants; as lender control becomes excessive, however, bondholders require compensation for the risk of losses due to creditor conflicts. Our heterogeneity tests show that the positive relation between bond yield and loan covenants is stronger when bond holding is more dispersed, for firms with higher default risk or better corporate governance as well as in the absence of relationship lenders.

DOI:10.1561/108.00000031