Using a measure of contract strictness based on the probability of a covenant violation, I investigate how lender-specific shocks impact the strictness of the loan contract that a borrower receives. Banks write tighter contracts than their peers after suffering payment defaults to their own loan portfolios, even when defaulting borrowers are in different industries and geographic regions from the current borrower. The effects persist after controlling for bank capitalization, although bank equity compression is also associated with tighter contracts. The evidence suggests that recent defaults inform the lender's perception of its own screening ability, thereby impacting its contracting behavior.
If you can't find a tool you're looking for, please click the link at the top of the page to "Go to old article view". Alternatively, view our Knowledge Base articles for additional help. Your feedback is important to us, so please let us know if you have comments or ideas for improvement.