Short-termism spillovers from the financial Industry

Accounting

Social Sciences Research Network

Bird A;Ertan A;Karolyi S A;Ruchti T

Aytekin Ertan

2016

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism incentives to spill over into the corporate sector. We find that lenders with short-termism incentives enforce material covenant violations at abnormally high rates. Further, they are more likely to target high-quality borrowers with which they have a prior relationship and that are less financially constrained. Affected borrowers are more likely to switch lenders, receive worse loan terms on future loans, and reduce investment. Market reactions to announcements of material covenant violations when lenders have short-term incentives are 0.88% lower, suggesting that short-termism spillovers are value-decreasing

Lending; Short-termism; Covenants; Monitoring; Spillovers; Real effects

Social Sciences Research Network

No

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