Banks Have Sticky Preferences for Loan Contract Design: Lender-Side Determinants of Debt Covenant Inclusion
Banks develop expertise from their prior lending experience in monitoring borrowers’ financial activities in order to mitigate conflicts of interests between managers and creditors arising from asymmetric information. In loan contracts, covenants have classically been viewed as a method of controlling agency problems by restricting managerial behavior.[1] Covenants can align the interests of the contracting… Read More »