The impact of entrepreneurial firm social purpose on bank loan officer decisions: a study of loan covenant violations

Abstract

PurposeLoan 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.Design/methodology/approachIn 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.FindingsConsistent 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.Originality/valueWhile 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.

Entrepreneurial performance and marketing analytics: the role of new product innovation

“…The empirical context of this study is UK-based entrepreneurial firms operating in the IT and telecoms industries. Entrepreneurial firms are often small and medium-sized enterprises (SMEs) (Austin et al, 2022) and, following the European Commission's definition, we targeted UK SMEs with fewer than 250 employees. A sampling frame of 5,000 entrepreneurial firms was obtained from a reputable UK-based database company.…”

“…The empirical context of this study is UK-based entrepreneurial firms operating in the IT and telecoms industries. Entrepreneurial firms are often small and medium-sized enterprises (SMEs) (Austin et al, 2022) senior product development and marketing strategy managers) and/or had strategic responsibility for their businesses (e.g. owners, managing directors, general managers).…”

“…In the context of entrepreneurial firms, which are often constrained by size and resources (Austin et al, 2022), NPI is grounded in firms' ability to collect, analyse and implement market intelligence to create innovative products. We propose two key dimensions of NPI: marketbased NPD and incremental innovation.…”

“…We aim to answer two research questions: what role does marketing analytics play in supporting business performance; and how does marketing analytics interact with NPI to influence and enhance business performance? In the context of entrepreneurial firms, which are often constrained by size and resources (Austin et al, 2022), NPI is grounded in firms' ability to collect, analyse and implement market intelligence to create innovative products. We propose two key dimensions of NPI: marketbased NPD and incremental innovation.…”

Financial Performance Analysis of PT XYZ and Compliance Of Financial Loan Covenant Toward Debt Repayment Capability

“…A covenant breach, the term for a violation of the covenants, may cause the lenders to tighten the covenants and increase loan spread in which the lenders get stricter in the disbursement of the subsequent loan issuance to the firm who has violated the covenant (Freudenberg et al, 2017). However, firms with social purposes that violate the covenants in the loan agreement tend to get penalized less severely than those without social purposes (Austin et al, 2022). A financial loan covenant, in particular, consists of a few sets of financial ratios that the firm, as the borrower, must maintain.…”