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Financial debt contracting and managerial agency problems

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  • Björn Imbierowicz
  • Daniel Streitz

Abstract

This paper analyzes if lenders resolve managerial agency problems in loan contracts using sweep covenants. Sweeps require a (partial) prepayment when triggered and are included in many contracts. Exploiting exogenous reductions in analyst coverage due to brokerage house mergers and closures, we find that increased borrower opacity significantly increases sweep use. The effect is strongest for borrowers with higher levels of managerial entrenchment and if lenders hold both debt and equity in the firm. Overall, our results suggest that lenders implement sweep covenants to mitigate managerial agency problems by limiting contingencies of wealth expropriation.

Suggested Citation

  • Björn Imbierowicz & Daniel Streitz, 2024. "Financial debt contracting and managerial agency problems," Financial Management, Financial Management Association International, vol. 53(1), pages 99-118, March.
    • Handle: RePEc:bla:finmgt:v:53:y:2024:i:1:p:99-118
    DOI: 10.1111/fima.12444
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