Lender forbearance

Bird, A, Ertan, A, Ruchti, T G and Karolyi, S A (2023) Lender forbearance. Journal of Financial and Quantitative Analysis, 57 (1). pp. 207-239. ISSN 0022-1090 OPEN ACCESS


We use a threshold-based design to study ex post discretion in lenders’ contractual enforcement of covenant violations. At preset thresholds, lenders enforce contractual breaches only infrequently, but this enforcement is associated with material consequences, e.g., fees and renegotiations. Enforcement varies significantly over time and peaks when credit conditions are tightest, indicating that enforcement is procyclical. Costly coordination reduces enforcement: syndicates with ex ante restrictive voting requirements enforce at lower rates. Consistent with theories of lender competition and implicit contracting, enforcement rates are lower for borrowers with access to alternative sources of financing and well-reputed lead arrangers.

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Item Type: Article
Subject Areas: Accounting
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© 2020 The Authors. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington.

This version is published under a Creative Commons CC-BY-NC-ND license. No commercial re-distribution or re-use allowed. Derivative works cannot be distributed.

Date Deposited: 04 Nov 2020 18:38
Date of first compliant deposit: 04 Nov 2020
Subjects: Credit management
Contracts and torts
Last Modified: 20 Jul 2023 00:41
URI: https://lbsresearch.london.edu/id/eprint/1536

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