Ahn and Choi (2009) note that loan maturity significantly influences the incentive of banks to strengthen their monitoring functions. A borrower who experiences monitoring in the early stage of a loan period may well have learned ways to avoid these checks and be able to behave opportunistically later in the life of the loan. So, banks may need to strengthen monitoring to avoid this behavior. Doing this will enable bank lenders to monitor effectively a borrower's performance through earnings, and the borrower's capacity to pay through the life of the loan, as the likelihood of information or agency problems increases with the length of the loan period.
Long-term debt with loan covenants also increase the likelihood of bank monitoring because of the potential agency costs associated with information asymmetry (Rajan and Winton 1995). Banks also have comparative advantage in having access to information on long-term borrowers (Smith and Ongena 1998), and can reduce duplicative monitoring costs since this type of loan tends to have longer maturities (Dennis and Mullineaux 2000). In sum, the literature implies a positive relationship between the incentives for banks to conduct monitoring and loan maturity. But it should be noted that several studies suggest a negative relationship, pointing out that short-term debt is more efficient in resolving agency problems in debt financing (Farinha and Santos 2002; Jones, Lang, and Nigro 2005, for example).