The Value of Soft Information in Debt Contracting: Evidence from Lender Visitation and Discussion Rights

Abstract

I provide empirical evidence with respect to the value of soft information in debt contracting. While prior literature has posited that soft information in lending plays an important role, empirical evidence is scant because such information is largely unquantifiable, and its collection is unobservable. I overcome these challenges by observing lender’s ability to access borrower key personnel using the “visitation and discussion rights” covenant in loan agreements. First, I find that more access to personnel is positively associated with a higher likelihood of loan renegotiation, suggesting that soft information access improves the lender’s monitoring of the current loan. Second, I find that more access to personnel is positively associated with the likelihood of future relationship lending, consistent with soft information access providing an information advantage to the incumbent lender over outside lenders. Third, conditional on relationship lending, access to personnel in the current loan is negatively associated with borrower’s credit rating downgrades in the subsequent loan. This is consistent with soft information access allowing lender to better evaluate and sort borrowers based upon credit quality. Fourth, conditional on relationship lending, access to personnel in the current loan is associated with a reduced number of covenants used in the subsequent loan, suggesting that past soft information access enables the relationship lender to reduce monitoring efforts in the future. Lastly, I provide evidence that borrowers benefit from providing key personnel access to the lender by having better access to finance during credit rationing periods. Collectively, this study adds new evidence to the value of soft information in private lending.