phbs
Debt Covenant Violations and Trade Credit
2014-11-13 08:23:29
by Zilong Zhang, Hong Kong University of Science and Technology

Wednesday, November 12, 2014 | 2:00pm – 3:00pm | Room 337, HSBC Business School Building


Abstract


This study examines how bank's intervention in a borrowing firm affects the firm's trade creditors. I find a significant decline in borrowing firms' trade credit when banks obtain additional control rights through the firms' covenant violations. Further, the reduction in trade credit is much larger when there is a greater probability of banks accelerating loan repayments. In addition, dependent suppliers that have made customer-specific investments are adversely affected by the decline in trade credit. Finally, expecting these consequences, a borrowing firm who has a dependent supplier will sign a loan contract with lower ex ante strictness, i.e., a smaller probability of bank intervention. The evidence suggests that bank intervention can impose real costs on an important third party and affect a borrower's contracting behavior.