Waiving Technical Default: The Role of Agency Costs and Bank Regulations

22 Pages Posted: 7 Dec 2006

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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.

Suggested Citation

Hassabelnaby, Hassan R., Waiving Technical Default: The Role of Agency Costs and Bank Regulations. Journal of Business Finance & Accounting, Vol. 33, No. 9-10, pp. 1368-1389, November/December 2006, Available at SSRN: https://ssrn.com/abstract=950047 or http://dx.doi.org/10.1111/j.1468-5957.2006.00633.x

Hassan R. Hassabelnaby (Contact Author)

Northern Kentucky University ( email )

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