Department of Finance, Insurance and Business Law

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Browsing Department of Finance, Insurance and Business Law by Subject "1502 Banking, Finance and Investment"

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    Debt covenants, bankruptcy risk, and the cost of debt
    Mansi, Sattar A.; Qi, Yaxuan; Wald, John (2020-11-16)
    Are all covenants equally effective at reducing the bondholder-shareholder conflict? Examining the most frequently used bond covenants, we document that four out of 24 restrictions are associated with significantly higher bankruptcy risk. The use of these Default Indicating covenants can be partly explained by faulty contract design, greater recovery in bankruptcy, or within-creditor conflicts. Firms that use In-House Counsel to help structure their bond issue and those that use Big 4 Auditors are also less likely to include Default Indicating covenants in their bonds. Further tests show that the use of these Default Indicating covenants is associated with higher bond and CDS spreads. Overall, the results help explain the prior evidence on the relation between covenant use and the cost of debt.
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    Economic policy uncertainty and allocative distortions
    Guedhami, Omrane; Mansi, Sattar A.; Reeb, David; Yasuda, Yukihiro (2021-12-14)
    We introduce this special issue on Economic Policy Uncertainty (EPU) with a focus on how EPU affects allocative efficiency. We observe that EPU affects the market value of firms in about 37% of Fama–French 30 industries, but leads to lower investments in 90% of them. Allocation decisions in a market economy rely on signals from the capital market, which EPU distorts. This may cause increasing conflicts of interest between managers and investors. We highlight key studies in the EPU literature and then describe each paper in this special issue. We also provide suggestions for future research.