How Does Lender Health Affect Covenant-Violating Borrowers?

Using the Emerging Market Debt Crises of the late 1990s, a shock that directly impacted some U.S. banks but not their domestic borrowers, we study the causal impact of lender health on covenant-violating borrowers. Using difference-in-differences, we find that banks exposed to the crises become relatively more likely to be stringent with covenant violators. Such stringency has real effects, as covenant violators become more likely to suffer a distressed delisting if their lenders are crisis-exposed. We also find effects for lender health on borrower investments, but these effects are not specific to covenant-violating borrowers