Research

This paper explains and quantifies the secular decline of financial covenants in private debt markets. Using a panel of U.S. syndicated loans from 1996 to 2023, I document that the annual incidence of covenant violations declines from 20% to below 5% over two decades, while the creditor intervention rate following a violation rises from 40% to over 70%. Crucially, this decline is accompanied by a reallocation across the micro-channels of creditor control: managerial discipline has weakened considerably while investment conservatism have become more important. I develop a micro-founded optimal contracting model that endogenizes covenant design through moral hazard, endogenous signal acquisition, and the contingent allocation of control rights. I structurally estimate the model using the Simulated Method of Moments, targeting causally identified moments from the reduced-form literature. The estimates reveal three forces behind the secular decline: a moderate easing of moral hazard frictions, improved signal informativeness, and a shift in the relative importance of the micro-mechanisms of creditor intervention. Together, these shifts characterize financial covenants as a fading tripwire: an alarm mechanism that is increasingly rarely set and functioning differently when triggered.

FIRS - JFI 2026 Best Student Paper Award.

This paper uncovers a novel contractionary channel through which quantitative easing (QE) affects corporate financing: the loan renegotiation channel. Using loan-level data from 2006 to 2024, we exploit cross-sectional variation in banks' pre-QE MBS holdings interacted with Federal Reserve purchase flows to identify causal effects on existing credit relationships. Within a firm-quarter design that absorbs borrower demand shocks and lender heterogeneity, we find that banks most exposed to QE purchases significantly increase lender-favorable renegotiations, tightening credit terms through commitment reductions, spread increases, maturity shortening, or additional collateral, while borrower-favorable amendments remain unaffected. High MBS exposure raises the probability of lender-favorable renegotiation by approximately 2.8%. Aggregating renegotiation exposure to the firm level, IV estimates indicate that a one-unit increase in exposure-weighted lender-favorable renegotiation reduces capital expenditure by 12.2% of lagged total assets. These findings establish loan renegotiation as a distinct intensive-margin mechanism through which unconventional monetary policy propagates to firm investment.