Senior Lender Control: Monitoring Spillover or Creditor Conflict?

Abstract

We find that senior loan lender control is positively associated with the corporate bond yield spread at issuance. A one standard deviation change in covenant intensity on a firm’s strictest loan is associated with a 20 basis points (bps) increase in its bond yield spread. The effect is more pronounced for issuers whose bondholders are dispersed or have weak shareholder presence. Our identification primarily relies on using lender-specific shocks as an instrument. Our results suggest that bondholders negatively price senior loan lender control rights outside of financial distress, despite the monitoring benefits they may provide.