Lenders' Influence on Borrower Firms' Internal Controls
I identify a covenant in commercial loan contracts that requires borrowers to provide lenders internal control-related private information. Lenders use accounting information to monitor loan contracts and reliable accounting information is dependent on effective internal controls of the firm. I argue and provide evidence that lenders are more likely to demand internal control-related private information when borrowers have weak internal controls, when lenders use more accounting information in debt contracts, and when debt contracts have terms that expose lenders to greater risk. I further show that lenders’ demand for internal control-related private information is positively associated with improvement in borrower firms’ internal controls as reflected in subsequent remediation and faster remediation of these firms’ material weaknesses in internal controls.
Hasan, Mahmudul MD., "Lenders' Influence on Borrower Firms' Internal Controls" (2019). ETD Collection for University of Texas, El Paso. AAI13864707.