We find that bond issuers receive bank loans with 11% fewer covenants when the secondary corporate bond market becomes more transparent. The treatment effect is more pronounced when the stock prices are less informative and when the debt-equity agency conflicts are more severe. The evidence suggests that bond market transparency mitigates information risk and enables better market disciplining of moral hazard. As such, private lenders impose fewer contractual restrictions in lending agreements. Treatment firms are also less likely to employ gradually tightening dynamic-threshold covenants as a signaling device. Finally, we find corroborating evidence from new primary bond issues.

Do banks rely on the bond market for borrower monitoring?

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