This study examines how a firm’s investment behavior relates to its subsequent bank loan contracting. A firm’s investment behavior has implications for its future cash flows and hence its credit risk. For this reason, firms that deviate from the desired level of investment may be at a disadvantage in obtaining private loans. Using a sample of U.S. firms during 1992–2011, we find that overinvesting firms obtain loans with less favorable terms, such as higher loan spreads, higher probability of loans having collateral requirements, and more covenant restrictions. Additional tests show that the effects of overinvestment on loan spreads and collateral requirements are generally more pronounced in firms with lower reputation, weaker shareholder rights, and lower institutional ownership.
|Publication status||Published - Aug 2015|
|Event||2015 American Accounting Association Annual Meeting - Chicago, United States|
Duration: 8 Aug 2015 → 12 Aug 2015
|Conference||2015 American Accounting Association Annual Meeting|
|Period||8/08/15 → 12/08/15|