N°23-35: Do Loans Carry a Control Spread? Evidence from the Allocation of Control Rights Across Creditors

This study investigates the influence of creditor control rights on the pricing of corporate loans. Using a novel hand-collected dataset, we differentiate between individual creditors who receive and do not receive control rights after a covenant violation. This differentiation allows us to isolate the influence of shifts in control rights on loan pricing from that of other factors related to covenant violations. We find that creditors exploit control rights to overprice new loans and that this pricing friction in the loan market is of first-order importance in explaining the variation in loan prices and the loan premium puzzle.