Events

Dr. Byron Y Song
Associate Professor
Head, Department of Accountancy and Law
Hong Kong Baptist University

We show that 9.2% of loan agreements in the U.S. contain a COVID-19 exclusion provision after the pandemic outbreak. This provision is embedded in the material adverse effect (MAE) clause of loan agreements and prohibits lenders from stopping funding the borrower due to the pandemic. We find that loan agreements are more likely to include this provision when (1) borrowers are more exposed to the COVID-19 pandemic; (2) lenders have superior risk-bearing ability; and (3) borrowers have stronger bargaining power. We further find that borrowers settle for stricter monitoring in exchange for this provision. Lastly, we show that borrowers with this provision are associated with less precautionary cash holding and more R&D spending during the pandemic, suggesting that the presence of this special provision significantly reduces borrowers’ assessment of future cash flow uncertainty. Overall, our study provides evidence that contracting parties use contractual mechanisms to mitigate efficiency loss induced by the pandemic.