Borrower Private Information Covenants and Loan Contract Monitoring and Renegotiation

Prior research finds that commercial borrowers provide lenders with private information, but generally does not identify the attributes of the information provided or the mechanisms by which it is provided, which has limited the insights generated as to how lenders obtain and use the information. To help fill this gap, in this paper we construct a novel database of covenants in 3,309 commercial loan contracts that require public borrowers to periodically provide lenders with three types of private information: (1) projected financial statements for future periods; (2) monthly financial statements; and (3) written communications received from auditors. We hypothesize and provide evidence that: (1) loan contracts are more likely to include these covenants when they enhance loan contract monitoring by lenders; (2) the covenants are positively associated with the frequency of loan contract amendments, a proxy for lenders' monitoring intensity; and (3) lenders trade on borrower private information, which may yield proprietary costs for borrowers.