Three Essays on Corporate Debt

This dissertation studies the behaviors of banks and borrowing firms in the corporate debt markets. The first essay examines the probability of exit for different types of investors in the syndicated loan market, as well as how the entry and exit of different types of investors is associated with changes in loan characteristics. Nonbanks, particularly CLOs, closed-end funds, and mutual funds, are more likely than bank lenders to exit the syndicate rather than to participate in the renegotiated loan. For mutual funds, greater net fund outflows imply a greater likelihood of exit, and this finding is consistent with nonbank lending creating greater systemic risk (Stein, 2013). For most nonbanks, the likelihood of an exit increases if the financial condition of the borrower improves and the potential for higher spreads wanes. Controlling for borrower risk, the addition of most nonbank institutions, in contrast to banks, is accompanied by an increase in loan spreads, but no significant increase in the number or tightness of covenants. The second essay explores the variation in maturity of new debt issues and examines firms' substitution between private and public debt. Prior literature suggests that both debt maturity and debt choice are endogenously determined by common firm fundamentals. Using instrumental variable analyses and simultaneous equation estimation, this study isolates the exogenous component of the debt maturity and choice of debt sources. Borrowing firms' asset maturity and effective tax rate are used to instrument for the debt maturity, while bank competition and bank liquidity in the borrowers' state are used to instrument for the debt choice. This study provides evidence for causality in both directions; firms which seek to increase the borrowing term by one standard deviation (equivalent with 5 years for an average debt issue) are 8% less likely to choose private bank loans, while firms which prefer private debt to public source tend to have shorter maturity by 49 months. The third essay analyzes the determinants and implications of confidentiality strictness in loan credit agreements. Borrowing firms which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, confidentiality strictness is negatively associated with the probability of a loan including financial covenants, especially capital-based covenants. Loan contracts for borrowing firms with stricter confidentiality, on average, are more relaxed, as evidenced by fewer covenants and a lower ex-ante probability of covenant violation. The results remain robust with the inclusion of various measures of market competition, suggesting that confidentiality strictness reflects unobservable strategic information pertaining to borrowing firms' potential exposure to the competitive environment. This greater sensitivity to competition improves corporate governance and consequently loosens bank loan monitoring.