Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants

This paper evaluates efforts made by development banks to promote tariff reform using covenants in infrastructure loan agreements. These covenants are evaluated within the broader context of tariff regulation in the water supply and sanitation sector. The paper outlines prerequisites for effective tariff regulation and reviews the experience with tariff regulation in developing countries and the current thinking regarding regulatory reform. Efforts by development banks to promote tariff regulation using loan covenants are often misdirected in light of the complexity of tariff regulation and the regulatory reform process.

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Loan Covenants: Evidence from India

SSRN Electronic Journal ◽

10.2139/ssrn.2136733 ◽

2012 ◽

Author(s):

Baag Pankaj ◽

Ashok Banerjee

Keyword(s):

Loan Covenants

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Tough Love: The Effects of Debt Contract Design on Firms’ Performance

The Review of Corporate Finance Studies ◽

10.1093/rcfs/cfz006 ◽

2019 ◽

Vol 9 (1) ◽

pp. 44-80

Author(s):

Ioannis Spyridopoulos

Keyword(s):

Firm Value ◽

Agency Conflicts ◽

Oxford University ◽

Debt Contract ◽

Positive Externalities ◽

Managerial Agency ◽

Editorial Decision ◽

Loan Covenants ◽

Instrumental Variables Approach ◽

Published Paper

Abstract I investigate whether restrictive loan covenants disrupt or improve firms’ operating performance. Using an instrumental variables approach to address the endogenous relationship between covenant strictness and firms’ efficiency, I find that stricter loan covenants lead to an increase in profitability and firm value even when firms do not violate a covenant. Stricter covenants improve performance only in firms with managerial agency conflicts: those without large shareholder ownership, facing softer competition in their product market, or with weaker shareholder rights. The evidence suggests that by designing stringent contracts ex ante, creditors create positive externalities in poorly governed firms through managerial incentives. Received December 7, 2018; editorial decision May 31, 2019 by Editor Uday Rajan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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