Should companies care who their lender is? Evidence from loan covenants

Non-bank lenders are an increasingly important part of the syndicated loan market, particularly for riskier borrowers who require intensive monitoring. Interestingly, when non-bank lenders arrange loans, they impose fewer and looser covenants. Although the prior literature shows that banks play an active role in corporate governance following covenant violations, non-banks are not likely to intervene in borrowers’ decision making in similar circumstances. We also investigate possible explanations for the weak enforcement of loan covenants by non-banks and find that non-bank lenders do not appear to improve their monitoring abilities by learning from previous default experiences on loan portfolios as banks do.