Abstract

http://ssrn.com/abstract=2288723
 
 

References (58)



 
 

Citations (1)



 


 



Sticky Covenants


Gus De Franco


University of Toronto - Rotman School of Management

Florin P. Vasvari


London Business School

Dushyantkumar Vyas


University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Regina Wittenberg Moerman


University of Chicago - Booth School of Business

December 30, 2013

Chicago Booth Research Paper No. 13-61
Rotman School of Management Working Paper No. 2288723

Abstract:     
We examine the determinants of the strength of bond covenants in protecting bondholders’ interests using a unique dataset constructed by Moody’s that allows us to measure the restrictiveness of bond covenant packages beyond the covenant inclusion measures used in the prior literature. We find that the covenant restrictiveness of a bond is highly persistent over time: it is strongly associated with the covenant restrictiveness of the borrower’s previous bond issues. We show that this persistence is driven by the restrictiveness of the covenant packages in previous bonds arranged by the firm’s underwriter or advised by the firm’s and underwriter’s legal counsels, consistent with these debt market intermediaries facing high switching costs in changing bond contractual terms. The restrictiveness of covenants in bonds issued by industry peers is another driver of the persistence, suggesting that covenants are written to facilitate bonds’ comparability. We next document that the bond covenant restrictiveness changes only when the borrower experiences a significant decline in its creditworthiness or when there is a substantial tightening in the credit supply in the economy. We also show that secondary bond market investors discount bond prices when bond covenants’ restrictiveness remains persistent despite a substantial decline in a borrower’s creditworthiness since the previous bond issue.

Number of Pages in PDF File: 64

Keywords: Covenants, Covenant Restrictiveness, Persistence, Secondary Bond Prices

JEL Classification: G12, G14, G32, M49

working papers series





Download This Paper

Date posted: July 4, 2013 ; Last revised: January 4, 2014

Suggested Citation

De Franco, Gus and Vasvari, Florin P. and Vyas, Dushyantkumar and Wittenberg Moerman, Regina, Sticky Covenants (December 30, 2013). Chicago Booth Research Paper No. 13-61; Rotman School of Management Working Paper No. 2288723. Available at SSRN: http://ssrn.com/abstract=2288723 or http://dx.doi.org/10.2139/ssrn.2288723

Contact Information

Gus De Franco
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
Florin P. Vasvari
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Dushyantkumar Vyas
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
University of Toronto at Mississauga ( email )
3359 Mississauga Rd N.
Mississauga, Ontario L5L 1C6
Canada
Regina Wittenberg Moerman (Contact Author)
University of Chicago - Booth School of Business ( email )
1369 E. Hyde Park Blvd
Chicago, IL 60637
United States
773-263-0101 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 886
Downloads: 156
Download Rank: 114,905
References:  58
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.484 seconds