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We find that senior loan lender control is positively associated with a firm’s corporate bond yield spread at issuance. A one standard deviation change in the number of covenants on the strictest loan on a firm’s balance sheet is associated with a 15 bps higher bond yield spread at issuance. Our results are invariant to using the number of financial covenants or covenant strictness to measure senior loan lender control. Using lender-specific shocks for identification produces consistent results. We further find that the positive association of loan lender control and bond yield is more pronounced for risky issuers and for issuers with dispersed bondholders but less pronounced when loans are provided by relationship lenders.
Author(s):
Bo Li
Tsinghua University
China
Lynnette Purda
Queen's University
Canada
Wei Wang
Queen's University
Canada