Waiving Technical Default: The Role of Agency Costs and Bank Regulations |
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| Authors: | Hassan R. HassabElnaby |
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| Affiliation: | The author gratefully acknowledges the helpful comments received from Mohammed Elnahal, Diana Franz, Emad Mohd, Michael Mosebach, Amal Said, Srini Sankaranarayanan, Glenn Wolfe, Benson Wier, participants at the 2002 AAA national meeting, 2002 AAA Mid-Atlantic Regional meeting, and the workshop participants at the University of Toledo and Virginia State University. The author also thanks Peter Pope (an editor) and the anonymous referee for constructive comments and suggestions. |
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| Abstract: | Abstract: This paper examines whether the characteristics of banks and borrowers are associated with banks' decisions to waive violations of debt covenants. The findings suggest that banks possess sufficient private information about firms, and they use this information in their waiver decisions. Banks' decisions to waive violations vary with the borrowers' agency costs, debt features, the banks' characteristics and regulatory circumstances, and the bank-firm business relationship. There is no evidence that syndicated loans, bank structure, and adverse economic conditions are significant determinants of the waiver decision. Research findings offer valuable insight into the theoretical and practical implications of debt covenants and agency costs. |
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| Keywords: | debt covenants covenant violation technical default agency costs regulatory capital ratio business relationship |
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