Abstract
- In this paper, we investigate whether lenders alter their degree of monitoring of loans givento a firm after a credit default Swap (CDS) becomes available for the firm. Using a sampleof nearly 21,000 loans taken by nearly 4600 non-financial U.S firms over the periodof 1996–2014, we find that lenders decrease their degree of monitoring on loans grantedto a firm after the inception of the firm’s CDS. The reduction in degree of monitoring isnot dependent on whether the lender holds the CDS or not. The availability of the CDSmotivates the lenders to decrease the degree of monitoring of loans granted to the firmevidenced by relatively lower degree of comprehensiveness and intensity of both financialand non-financial covenants attached to the post-CDS loans. These findings are robust toloan and firm characteristics, and different measures of covenant comprehensiveness andintensity.