TY - JOUR
T1 - Covenants and Collateral as Incentives to Monitor
AU - RAJAN, RAGHURAM
AU - WINTON, ANDREW
PY - 1995/9
Y1 - 1995/9
N2 - Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do this. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make a loan's effective maturity, and the ability to collateralize makes a loan's effective priority, contingent on monitoring by the lender. Thus both covenants and collateral can be motivated as contractual devices that increase a lender's incentive to monitor. These results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending. 1995 The American Finance Association
AB - Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do this. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make a loan's effective maturity, and the ability to collateralize makes a loan's effective priority, contingent on monitoring by the lender. Thus both covenants and collateral can be motivated as contractual devices that increase a lender's incentive to monitor. These results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending. 1995 The American Finance Association
UR - http://www.scopus.com/inward/record.url?scp=84993869749&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84993869749&partnerID=8YFLogxK
U2 - 10.1111/j.1540-6261.1995.tb04052.x
DO - 10.1111/j.1540-6261.1995.tb04052.x
M3 - Article
AN - SCOPUS:84993869749
SN - 0022-1082
VL - 50
SP - 1113
EP - 1146
JO - The Journal of Finance
JF - The Journal of Finance
IS - 4
ER -