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We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance. AbstractWe provide novel empirical evidence of a direct contracting channel through which firm financial policy affects firm investment policy. We examine a large sample of private credit agreements between banks and publicly traded U.S. corporations and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a restriction following negative borrower performance, and the effect of negative performance on the likelihood of facing a capital expenditure restriction is larger than the effect of negative performance on other loan terms such as the interest spread or pledging of collateral. We also demonstrate that the restrictions affect firm investment policy. For example, we show that most of the actual capital expenditures of borrowers with restrictions cluster just below their restricted amount, while in the year prior to the contract, the same borrowers' capital expenditures are distributed evenly above and below the restriction. Our results are consistent with control-based theories of financing in which creditors retain control rights over investment policy as a second-best solution to agency conflicts.

We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance. AbstractWe provide novel empirical evidence of a direct contracting channel through which firm financial policy affects firm investment policy. We examine a large sample of private credit agreements between banks and publicly traded U.S. corporations and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a restriction following negative borrower performance, and the effect of negative performance on the likelihood of facing a capital expenditure restriction is larger than the effect of negative performance on other loan terms such as the interest spread or pledging of collateral. We also demonstrate that the restrictions affect firm investment policy. For example, we show that most of the actual capital expenditures of borrowers with restrictions cluster just below their restricted amount, while in the year prior to the contract, the same borrowers' capital expenditures are distributed evenly above and below the restriction. Our results are consistent with control-based theories of financing in which creditors retain control rights over investment policy as a second-best solution to agency conflicts.

We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home "bias." This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home "bias" appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.