Covenant Violations, Collateral and Access to Funding: Private Firms and Public Firms

Covenants are an important feature of loan contracts that enable ongoing monitoring of borrowers by banks and flexible renegotiation of contract terms in the face of changing external and borrower conditions.  A large body of empirical research has examined the consequences of loan covenant violations for public firms.  However, little is known about how banks react to covenant violations by private companies, despite the large share of these firms in the economy. Any reduction in access to loans is likely to have a more direct impact on investment and employment for private firms since they are primarily reliant on banks … Read more