Bank relationship and contractual flexibility: Evidence from covenant enforcement
Yong Kyu Gam,
Chunbo Liu
Abstract:This paper investigates how banks utilize soft information to provide contractual flexibility in loan covenant enforcement. We find that relationship lenders are significantly less likely than non‐relationship lenders to enforce covenants for material violations when borrowers are potentially in breach of financial covenants. The mitigation of information asymmetry by relationship lending, as opposed to alternative explanations, serves as the underlying mechanism. Furthermore, relationship borrowers with poten… Show more
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