Debt covenants, bankruptcy risk, and the cost of debt

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dc.contributor.authorMansi, Sattar A.en
dc.contributor.authorQi, Yaxuanen
dc.contributor.authorWald, Johnen
dc.date.accessioned2021-12-14T22:26:01Zen
dc.date.available2021-12-14T22:26:01Zen
dc.date.issued2020-11-16en
dc.date.updated2021-12-14T22:25:59Zen
dc.description.abstractAre 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.en
dc.description.versionAccepted versionen
dc.format.mimetypeapplication/pdfen
dc.identifier.orcidMansi, Sattar [0000-0001-7098-7996]en
dc.identifier.urihttp://hdl.handle.net/10919/106992en
dc.language.isoenen
dc.rightsIn Copyrighten
dc.rights.urihttp://rightsstatements.org/vocab/InC/1.0/en
dc.subjectFinanceen
dc.subject1502 Banking, Finance and Investmenten
dc.titleDebt covenants, bankruptcy risk, and the cost of debten
dc.title.serialJournal of Corporate Financeen
dc.typeArticle - Refereeden
dc.type.dcmitypeTexten
dc.type.otherArticleen
dcterms.dateAccepted2020-11-16en
pubs.organisational-group/Virginia Techen
pubs.organisational-group/Virginia Tech/Pamplin College of Businessen
pubs.organisational-group/Virginia Tech/Pamplin College of Business/Finance, Insurance, and Business Lawen
pubs.organisational-group/Virginia Tech/All T&R Facultyen
pubs.organisational-group/Virginia Tech/Pamplin College of Business/PCOB T&R Facultyen

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