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Bank Lending

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Seaport A
Hosted By: American Finance Association
  • Chair: Justin Murfin, Cornell University

Securities Laws, Bank Monitoring, and the Choice Between Cov-Lite Loans and Bonds for Highly Levered Firms

Robert Prilmeier
Tulane University
Rene Stulz
Ohio State University


In contrast to bonds, cov-lite loans do not require SEC registration and are not subject to securities laws. We show that this distinction plays an important role in firms’ choice between funding through cov-lite loans and bonds and helps understand why the market share of cov-lite loans has increased so much. Compared to cov-heavy loans, cov-lite loans are close substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans. SEC-reporting firms that borrow using cov-lite loans are more likely to deregister subsequently. Non-reporting firms are more likely to borrow through cov-lite loans than through bonds, even though maturities, amounts, covenants, and ratings are similar between the two sources of funding. As expected from theory, we find that the liquidity advantage of cov-lite loans over cov-heavy loans is highest for non-registered issuers where information asymmetries are greater, which may help explain why credit spreads on cov-lites are lower than on cov-heavy loans for private firms.

Disaster Lending: “Fair” Prices, but “Unfair” Access

Taylor Begley
Washington University-St. Louis
Umit Gurun
University of Texas-Dallas
Amiyatosh Purnanandam
University of Michigan
Daniel Weagley
Georgia Institute of Technology


We find that under risk-insensitive loan pricing – a feature present in many government programs – marginal-credit-quality borrowers are less likely to receive credit. By restricting price flexibility, marginal applicants that would likely receive a loan at a higher interest rate are instead denied credit altogether. Our particular setting is the Small Business Administration’s disaster-relief home loan program. This program screens applicants on credit quality, but cannot price loans according to credit risk. We find that this program denies more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality, even relative to private-market denial rates. Thus, despite ensuring “fair” prices, risk-insensitive pricing may lead to “unfair” access to credit.

Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads

Cem Demiroglu
Koc University
Christopher James
University of Florida
Guner Velioglu
Loyola University Chicago


Past studies provide evidence that commercial loan spreads are "sticky," in the sense that they do not fully respond to changes in market rates or firm credit risk characteristics. In this paper, we provide evidence that stickiness arises, in part because bank screening based on private soft information varies with changes in credit risk. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing and may arise even in the absence of credit rationing, bank information monopolies, or behavioral biases in loan contracting.
Gregory Nini
Drexel University
Sahil Raina
University of Alberta
Ryan Pratt
Brigham Young University
JEL Classifications
  • G2 - Financial Institutions and Services