Document de travail

Multiple Lenders, Strategic Default and the Role of Debt Covenants

Andrea Attar, Catherine Casamatta, Arnold Chassagnon et Jean-Paul Décamps

Résumé

We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.

Mots-clés

Side Trading; Financial Covenants; Nonexclusive Competition; Strategic Default;

Codes JEL

  • D43: Oligopoly and Other Forms of Market Imperfection
  • D82: Asymmetric and Private Information • Mechanism Design
  • G33: Bankruptcy • Liquidation

Remplacé par

Andrea Attar, Catherine Casamatta, Arnold Chassagnon et Jean-Paul Décamps, « Multiple Lenders, Strategic Default and the Role of Debt Covenants », American Economic Journal: Microeconomics, vol. 11, n° 2, mai 2019, p. 98–130.

Référence

Andrea Attar, Catherine Casamatta, Arnold Chassagnon et Jean-Paul Décamps, « Multiple Lenders, Strategic Default and the Role of Debt Covenants », octobre 2010, révision octobre 2015.

Voir aussi

Publié dans

octobre 2010, révision octobre 2015