Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants

Zhang, Zhipeng

doi:10.2139/ssrn.1346163

Abstract

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Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants

Zhipeng Zhang

Boston College

January 10, 2009

AFA 2010 Atlanta Meetings Paper

Abstract:
For U.S. firms from 1988 to 2007, firms with stricter loan covenants had higher firm-level default recovery rates. Covenants were stricter, moreover, when set during downturns in the business cycle. This implies a negative dependence of recovery rates on lagged macroeconomic conditions. That is, bank loan contracts established in economic recessions have tight covenants, leading later to higher recovery rates. My empirical evidence suggests that private creditors have significant influence on firms' bankruptcy decisions through the channel of covenants in debt contracts.

Number of Pages in PDF File: 58

Keywords: Recovery rate, Bankruptcy, Loan covenant, Creditor control, Business cycle

JEL Classification: G33, G32, E32, G21

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Date posted: February 19, 2009 ; Last revised: January 24, 2010

Suggested Citation

Zhang, Zhipeng, Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants (January 10, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1346163 or http://dx.doi.org/10.2139/ssrn.1346163

Contact Information

Zhipeng Zhang (Contact Author)

Boston College ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
(617)552-4863 (Phone)
(617) 552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~zhangzc/