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Bank lending relationships and the use of performance-sensitive debt

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  • Adam, Tim R.
  • Streitz, Daniel

Abstract

We show that performance-sensitive debt (PSD) is used to reduce hold-up problems in repeated lending relationships. Using a large sample of bank loans, we find a more frequent use of PSD if hold-up is more likely, e.g. if a longterm lending relationship exists and the borrower has fewer outside financing alternatives. The use of PSD is less likely in syndicated relationship loans, as hold-up is less important in this market. Finally, we find a substitution effect between the use of PSD and the tightness of financial covenants, which is consistent with PSD reducing hold-up problems caused by the use of covenants.

Suggested Citation

  • Adam, Tim R. & Streitz, Daniel, 2013. "Bank lending relationships and the use of performance-sensitive debt," SFB 649 Discussion Papers 2013-027, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
  • Handle: RePEc:zbw:sfb649:sfb649dp2013-027
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    2. Anna Bergman Brown, 2016. "Institutional Differences and International Private Debt Markets: A Test Using Mandatory IFRS Adoption," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 679-723, June.

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    More about this item

    Keywords

    performance-sensitive debt; relationship lending; hold-up; covenants;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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