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Bank Lending Relationships and the Use of Performance-Sensitive Debt

  • Tim R. Adam
  • Daniel Streitz

We show that performance-sensitive debt (PSD) is used to reduce hold-up problems in repeated lending relationships. Using a large sample of bank loans, we find a more frequent use of PSD if hold-up is more likely, e.g. if a longterm lending relationship exists and the borrower has fewer outside financing alternatives. The use of PSD is less likely in syndicated relationship loans, as hold-up is less important in this market. Finally, we find a substitution effect between the use of PSD and the tightness of financial covenants, which is consistent with PSD reducing hold-up problems caused by the use of covenants.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-027.

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Length: 50 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2013-027
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