TY - JOUR
T1 - Bank Skin in the Game and Loan Contract Design
T2 - Evidence from Covenant-Lite Loans
AU - Billett, Matthew T.
AU - Elkamhi, Redouane
AU - Popov, Latchezar
AU - Pungaliya, Raunaq S.
N1 - Publisher Copyright:
Copyright © Michael G. Foster School of Business, University of Washington 2016.
PY - 2016/6/1
Y1 - 2016/6/1
N2 - In a model of dual-agency problems where borrower-lender and bank-nonbank incentives may conflict, we predict a hockey stick relation between bank skin in the game and covenant tightness. As bank participation declines, covenant tightness increases until reaching a low threshold, at which point the relation sharply reverses and covenant protection is removed with a commensurate increase in spread. We find support for the hockey stick relation with bank's stake in covenant-lite loans averaging 8% (0% median). We also find that covenant-lite loans are more likely when borrower moral hazard is less severe and when bank relationship rents are high.
AB - In a model of dual-agency problems where borrower-lender and bank-nonbank incentives may conflict, we predict a hockey stick relation between bank skin in the game and covenant tightness. As bank participation declines, covenant tightness increases until reaching a low threshold, at which point the relation sharply reverses and covenant protection is removed with a commensurate increase in spread. We find support for the hockey stick relation with bank's stake in covenant-lite loans averaging 8% (0% median). We also find that covenant-lite loans are more likely when borrower moral hazard is less severe and when bank relationship rents are high.
UR - http://www.scopus.com/inward/record.url?scp=84978476568&partnerID=8YFLogxK
U2 - 10.1017/S0022109016000326
DO - 10.1017/S0022109016000326
M3 - Article
AN - SCOPUS:84978476568
VL - 51
SP - 839
EP - 873
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
SN - 0022-1090
IS - 3
ER -