Investment Sensitivity to Lender Default Shocks

We investigate how idiosyncratic lender shocks impact corporate investment. Lenders with recent default experience write stricter loan contracts, leading to a reduction in real investment for borrowing firms. The decline in investment is not attributable to loan riskiness, borrower's agency costs, the lender-borrower relationship nexus, lender capitalization, or to borrower interest rate sensitivity, but is more pronounced when the lender faces higher incentives to learn. The evidence suggests that defaults inform lenders about investment opportunities and their screening ability, and adjustments to this information have real economic consequences