Short-termism spillovers from the financial industry

Bird, A, Ertan, A, Karolyi, S A and Ruchti, T G (2022) Short-termism spillovers from the financial industry. Review of Financial Studies, 35 (7). pp. 3467-3524. ISSN 0893-9454

Abstract

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism to spill over to their borrowers. We find that short-termist lenders are significantly more likely to enforce covenant breaches. This behavior is pronounced when performance benchmarks are precise or salient, and when managers have high pay-performance sensitivity, but not when they face strong shareholder governance. Affected borrowers are more likely to switch lenders, pay higher spreads on renegotiated loans, and reduce investment. Our findings suggest that bank managers trade off relationship capital for income-boosting fees and term changes from covenant enforcement to meet earnings benchmarks

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Item Type:	Article
Subject Areas:	Accounting
Additional Information:	© 2020 Society for Financial Studies. This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record (Bird, A, Ertan, A, Karolyi, S A and Ruchti, T G (2021) Short-termism spillovers from the financial industry. Review of Financial Studies) will be available online at: https://doi.org/10.1093/rfs/hhab108.
Date Deposited:	05 Nov 2020 14:43
Date of first compliant deposit:	04 Nov 2020
Subjects:	Financial markets
Last Modified:	21 Dec 2024 02:47
URI:	https://lbsresearch.london.edu/id/eprint/1538

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