Andrea Attar, Catherine Casamatta, Arnold Chassagnon et Jean-Paul Décamps, « Multiple Lenders, Strategic Default and the Role of Debt Covenants », octobre 2010, révision octobre 2015.


We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.


Side Trading; Financial Covenants; Nonexclusive Competition; Strategic Default;

Codes JEL

  • D43: Oligopoly and Other Forms of Market Imperfection
  • D82: Asymmetric and Private Information • Mechanism Design
  • G33: Bankruptcy • Liquidation

Partenaire de recherche

Paul Woolley Research Initiative

Thème de recherche

Allocative Efficiency and the Macro-Economy