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Bank Interventions and Trade Credit: Evidence from Debt Covenant Violations

Published online by Cambridge University Press:  19 September 2018

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Abstract

This study examines the consequences of conflicts between creditors. Using the setting of debt covenant violations, I employ a regression discontinuity design to identify the effect of banks’ interventions on their borrowers’ trade credit. The results show that trade credit experiences a substantial decline when banks intervene in the borrowing firm following covenant violations. The decline is mitigated by the presence of dependent suppliers and exacerbated by banks’ incentives to exercise control rights. Such externalities are reflected in the loan-contract design. Borrowing firms sign less restrictive loan contracts when they rely more on trade credit or trade creditors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 5 , October 2019 , pp. 2179 - 2207
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

I am grateful to my dissertation committee members Vidhan Goyal (chair), Sudipto Dasgupta, Kasper Nielsen, and Tai-Yuan Chen for helpful advice and discussions. This article also benefited from constructive comments from Heitor Almeida (the referee), Utpal Bhattacharya, Jie Deng, David Denis, Pengjie Gao, Guojun He, Kai Li, Oliver Li, Ruicong Li, Weikai Li, Yupeng Lin, Laura Liu, Xuewen Liu, Mark Loewenstein, Fangyuan Ma, Paul Malatesta (the editor), Abhiroop Mukherjee, Jun Qian, Rik Sen, Stephen Sun, Sheridan Titman, Baolian Wang, Wei Wang, Fan Yu, and seminar participants at the 2014 Australasian Finance and Banking Conference, 2014 Financial Management Association Asian Conference Doctoral Consortium, 2014 Summer Institute of Finance Conference, 2015 China International Conference in Finance, City University of Hong Kong, Hong Kong University of Science and Technology, University of Kansas, Kobe University, Peking University, Shanghai Advanced Institute of Finance, and Zhejiang University. A previous version of this paper circulated under the title “Debt Covenant Violations and Trade Credit.” I acknowledge financial support from the start-up grant of the City University of Hong Kong (Project Number 7200490).

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