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Attar, Andrea
, Casamatta, Catherine, Chassagnon, Arnold and Décamps, Jean-Paul
(2019)
Multiple lenders, strategic default and the role of debt covenants.
American Economic Journal: Microeconomics, vol. 11 (n° 2).
pp. 98-130.
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Abstract
We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.
| Item Type: | Article |
|---|---|
| Language: | English |
| Date: | May 2019 |
| Refereed: | Yes |
| Uncontrolled Keywords: | Side Trading, Financial Covenants, Nonexclusive Competition, Strategic Default |
| JEL Classification: | D43 - Oligopoly and Other Forms of Market Imperfection D82 - Asymmetric and Private Information G33 - Bankruptcy; Liquidation |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse), TSM Research (Toulouse) |
| Site: | UT1 |
| Date Deposited: | 21 Jan 2019 13:21 |
| Last Modified: | 09 Sep 2021 08:37 |
| OAI Identifier: | oai:tse-fr.eu:33244 |
| URI: | https://publications.ut-capitole.fr/id/eprint/30822 |
Available Versions of this Item
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Multiple Lenders, Strategic Default and the Role of Debt Covenants. (deposited 05 Nov 2015 15:13)
- Multiple lenders, strategic default and the role of debt covenants. (deposited 21 Jan 2019 13:21) [Currently Displayed]
