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The purpose of this paper is to investigate the association between the purpose of a loan and the type of debt covenants, separated into balance sheet-based and income statement-based covenants.

Using private loan deal observations obtained from the DealScan database over the period between 1996 and 2013, the authors classify the sample loan deals into three categories based on the purpose of borrowing, namely, borrowings for corporate daily operating purposes, financing purposes and acquisition and investing purposes. The authors conduct multinomial logistic regression analysis to test the relationship between the choice of financial ratios in a debt covenant and the purpose of a loan, controlling for financing constraints and other factors that have been identified as important to debt covenant analysis in prior studies.

The results provide evidence that the purpose of the loan is significantly associated with the type of debt covenants, suggesting that the lender and the borrower have considered the loan purpose when structuring their debt agreements. More specifically, the results indicate that the loans borrowed to fund acquisitions or long-term investment projects are more likely to have income statement-based covenants and less likely to have balance sheet-based covenants. In contrast, the loans borrowed for corporate daily operating purposes or financing purposes are more likely to contain balance sheet-based covenants relative to income statement-based covenants.

The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency. The results are limited to the US market with its institutional structure. In future studies, it would be interesting to perform similar investigations on firms in other countries.

The findings contain important and economically significant implications indicating that loan lenders and borrowers agree to include different types of accounting information (that is, income statement- versus balance sheet-based financial ratios) in their loan covenants for different purpose loans.

Overall, the results provide important evidence regarding the connection between debt covenant structure and loan purpose. In doing so, it contributes to the literature on debt contract design (Dichev and Skinner 2002; Chava and Roberts 2008; Demerjian 2011; Christensen and Nikolaev 2012). Despite much interest in debt contract design, Skinner (2011) argues that there still exists incomplete knowledge of the economic factors that structure debt contracts. Income statement-based covenants depend on measures of profitability and efficiency and act as trip wires that transfer control rights to lenders when borrowing firms’ performance deteriorates. On the other hand, balance sheet-based covenants rely on information about sources and uses of capital and align interests between borrowing firms and lenders by restricting the borrower’s capital structure. The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency.

This study is the first to identify differences in trends over time for the use of income statement- and balance sheet-based covenants as it relates to different loan purposes. The authors build on prior research to examine the degree to which loan purpose is associated with the choice between income statement-based and balance sheet-based covenants.

Despite the emergence of peer-to-peer (P2P) lending in Malaysia, there is a knowledge gap on what drives the lending decision of P2P lending in the emerging Malaysian market. This research investigates how borrower's loan tenure, funding purpose, verified documents, accumulated transaction and repayment history, age, trustworthy and geographical resemblance affect likelihood of lending decision in P2P platform.

Using snowball sampling, survey data was collected from 300 online banking users who were willing to invest in online P2P platform from different states in Malaysia (i.e. Selangor, Malacca, Johor and Negeri Sembilan). For estimation, regression analyses were estimated.

The findings suggest that borrower's loan tenure and borrower's age increase the probability of lending in online P2P platform, while funding purpose of credit card reduces the likelihood of lending in the P2P platform. The findings contribute to the signalling theory.

The findings imply that borrowers need to concentrate on loan tenure and clearly indicate their age in the listing in order to increase the funding probability. Moreover, they are suggested not to submit listing for credit card as funding purpose.

This study is first in its nature about P2P lending in Malaysia and the possible factors that influence lending decisions in this new financing platform.

Loan officer decisions are of particular importance to entrepreneurial firms which rely heavily on debt financing as a primary source of capital. The authors investigate whether social purpose in these firms impact loan officer response to the violation of a debt covenant and whether there is a differential response in decision making between loan officers that work at local banks and those that work at national banks.

In total 332 loan officers from cities in the South and Midwest United States participated in a quasi-experiment comparing entrepreneurial firms that violated their debt covenants. The loan officers were asked to evaluate loan materials and decide whether they would enforce loan covenant provisions of renegotiated interest rate and by what magnitude. In the treatment group, the loan officer evaluated loan materials of an entrepreneurial firm that included information related to the firms social purpose within their community. In the control group, the evaluation materials did not include this information.

Consistent with social capital theory, the results suggest that loan officers view community involvement as beneficial to entrepreneurial firm value. Loan officers were less likely to increase interest rates among firms that demonstrated social purpose. Loan officers that decided to increase interest rates punished socially purposeful firms less severely than non-socially purposeful firms. Additionally, loan officers at community banks were less likely to increase interest rates than those at national banks.

While the prior literature examines loan covenant violations, the authors focus on the impact of loan officer decision making in entrepreneurial firms specifically around covenant enforcement. Loan officer decisions have important implications for debt financing but are typically not observable to researchers. Prior work examining the relationship between social purpose and debt financing focuses on large public firms. This study recognizes that social purpose in entrepreneurial firms is less formalized and explicit and thus should be studied separately from large firms.

The purpose of this paper is to investigate whether a firm’s undertaking of a bond IPO influences the monitoring of the private loans granted to the firm by private lenders. If it does, in which direction the monitoring changes?

The author uses both univariate and multivariate analyses to test the hypothesis. For the purposes of this research, the author’s primary data sources are LPC Dealscan, which provides data on private loans; Mergent FISD, which provides data on public bond issues; and the Compustat Industrial Annual Database, which provides the required financial data for the sample firms. The author’s sample covers non-financial US firms for the period of 1991-2010. The author’s final sample consists of nearly 23,000 private loans granted to about 5,500 non-financial US firms.

The major finding of this research is that private lenders increase their degree of monitoring of loans that they extend to a firm after it issues a bond IPO. The results of the two-stage bond IPO anticipation model further strengthen the findings. The evidence suggests that as the firm issues public debt for the first time, private lenders get concerned about the potential increase of agency problems and leverage, and consequently, find it valuable to increase the degree of monitoring of loans. Also, the magnitude of change in monitoring is strongly influenced by the degree of information asymmetry, leverage, profitability, and potential to waste free cash flow.

This paper enhances one’s understanding of the contracting dynamics between private lenders and the firm as it issues in the public debt market. The findings can aid firms anticipate the borrowing conditions they will face if they undertake a bond IPO. Further, the cross-sectional analysis on covenant changes from pre- to post-bond IPO period identifies specific firm characteristics that impact the magnitude of change of covenant intensity and comprehensiveness. As a result, uncertainty regarding post-bond IPO outcomes is reduced for borrowing firms.

According to the 70th round of the National Sample Survey published by the Government of India in 2014, the incidence of indebtedness among households in the rural areas of Telangana state, India, is twice that of rural all-India. Around 59 per cent of rural households are indebted in Telangana as against 31 per cent all-India. The purpose of this paper is to examine the extent and magnitude of indebtedness among rural households in the Medak district of Telangana state. Further, the authors wanted to identify the sources of credit to these households and for what purpose the loans were utilised.

To achieve the objective, the authors conducted a primary-level household survey in one of the distressed districts in newly formed state. The authors applied the Bayesian and the Lasso regression methods to identify the factors that impact indebtedness of a household.

The OLS results based on the Lasso regression results show that among all the explanatory variables, principal occupation, use of modern technology, the rate of interest, household medical expenditure and source of loan are significant, indicating that these variables significantly affect the loan taken by the farmers in the study area. The study shows that alternative sources of non-farm income and promotion of modern technology in agriculture can reduce the incidence of farmers’ indebtedness in India.

The paper contains significant information with regard to indebtedness. It focusses on the issue troubling the authorities the most. It provides the ground realities of the incidence of indebtedness in Medak, one of the most distressed districts of Telangana, a Southern Indian state. There have been very few similar studies done in the newly formed state. The paper has employed an advanced statistical technique, i.e. Heckman’s selection regression technique, to study farmers’ indebtedness in India. It provides a means of correcting for non-randomly selected samples, which otherwise can lead to erroneous conclusions and poor policy.

This study aims to examine the accessibility, loan purposes and effects of informal credits on poor households in Northern mountainous Vietnam.

This study used primary data collected directly from surveying 402 poor households in Thai Nguyen province using a well-designed questionnaire. The probit model is employed to specify which factors affect access to informal credit, the tobit model is used to estimate the borrowing functions specified. In addition, descriptive statistical analysis is also used to describe the accessibility, purposes and effects of informal credit on poor households.

The results show that there is a considerably high proportion of informal borrowings from relatives, neighboring villagers, professional moneylenders, rotating saving and credit groups, trade credits and mortgages. Labor force ratio, social capital and residential land areas are the key determinants of poor households' informal borrowings. The purposes of borrowing are diverse. The informal loans also have certain significant effects on poverty reduction and the welfare of poor households.

The effects of the informal loans on house welfare should be quantitatively evaluated.

The findings from these analyses allow us to draw relevant policy implications for the development of rural finance in other low-income, developing countries.

This research contributes to the body of published literature in several ways. Firstly, it provides understanding of the performance of the informal financial subsector. Secondly, the informal subsector of rural finance is evaluated in close relation to the formal subsector.

This chapter examines the effect of creditors’ monitoring role on the profitability of firm acquisitions. We use the shares retained by the lead arranger of a syndicated loan as a proxy for monitoring level. We find that acquirer announcement returns are positively related to the shares retained by the lead arranger. The effect of the lead arranger’s shares on the acquirer’s return becomes pronounced in cash acquisition deals, and when there exist financial covenants. Our results suggest that lead arrangers are important not only for monitoring loans but also for successful acquisitions by borrowers. An important policy implication of the main findings of this chapter on bank monitoring is that policy makers should design financial covenants to improve the efficiency of monitoring activities by lead arranging banks in syndicated bank loan deals.

The purpose of this research is to explore the possibility of integrating women‐centred savings schemes into formal finance systems in order to help such schemes to leverage finance for housing purposes.

The research adopts a case study approach that uses mainly semi‐structured interviews. The case studies involve two savings schemes with their respective supporting organisations and five commercial banks in South Africa.

The case studies show that, if savings systems are flexible and suitable to their needs, women are capable of saving and repaying housing loans. The results also suggest that the accumulated group savings and the savings schemes themselves act as good collateral. However, despite showing interest in involvement in the low‐income sector, banks do not have a financially viable and workable business model to exploit this potential market.

Integrated community housing is essential. Future research is required to determine how good repayment rates could be achieved while maintaining risks at acceptable levels.

For practical purposes, collaboration with intermediary organisations working with women‐centred savings schemes would be a beneficial starting point in linking the savings schemes with formal finance systems.

The paper provides valuable reference material for understanding the gap that exists between what banks currently offer and what poor households require in meeting their housing needs. It may also be useful to researchers and practitioners as a basis for exploring innovative finance models for banks.

The purpose of this study is to examine the impact of supervisory Leveraged Lending Guidance (LLG) (2013–2014) on risk and structure of syndicated loans arranged by the largest US banks with participation of nonbank lenders.

This study uses supervisory shared national credit loan-level data from 2010 to 2015 and DealScan loan origination data and use linear regressions with clustered standard errors.

This study finds that the impact of the LLG was mixed. Incidence and risk of leveraged lending declined following the Guidance, as reflected in lower nonbank syndicate participation. However, the covenant protections weakened and loan spreads at origination declined. This study also provides evidence that some risky lending originations shifted to nonbank entities outside of the banking regulatory environment.

This study contributes and expands literature on the impact of regulatory guidance on loan risk, terms and structure, focusing on nonbank participation in syndicated commercial loans.

The purpose of this paper is to weigh up the effect of index-based livestock insurance (IBLI) on loan take up behavior of the pastoral households in the Borena zone of Southern Ethiopia. Although the insurance was introduced over the last decade and it appears to have promising welfare benefit, there is a lack of pragmatic evidence on its effect in leveraging the household’s future wealth for the hope of better productivity in the present.

The authors analyze household-level unique panel data collected in three rounds using descriptive statistics and the fixed effect model estimated by least squares dummy variable analysis.

The authors found that the IBLI appears to have a positive and significant effect on the loan uptake behavior of the herding households.

This increased likelihood of loan uptake suggests that the insurance can reduce the cognitive cost of loan default that would occur due to weather shocks and build-up of the household’s confidence to uptake loan. Consequently, this likelihood can promote the creditworthiness of the insured and reduce his/her fear and worry regarding the possibility of loan delinquency.

The paper is, except where otherwise stated, entirely new work.