Loan covenants and corporate debt policy under bank regulations
Journal
Journal of Banking and Finance
Journal Volume
19
Journal Issue
8
Pages
1419-1436
Date Issued
1995
Author(s)
Abstract
Firms rely heavily on short-term, flexible bank credit to finance certain projects. Banks offer such "bridge" loans after imposing safety covenants on their clients. These covenants have important spill-over effects on the values of the firm's other corporate debt liabilities and its equity value. In particular, we demonstrate that the firm's senior bondholders derive a implicit value of protection by delegating the responsibility of monitoring the firm to the bank. We examine the firm's optimal debt policy under alternative bank credit regimes. Since the bank's choice of covenants may depend on the nature of the bank regulatory environment, our paper highlights the indirect link between bank regulations and corporate debt policy. © 1995.
SDGs
Type
journal article