How Legal Environments Affect the Use of Bond Covenants
Journal of International Business Studies (JIBS), Forthcoming
49 Pages Posted: 10 Feb 2009 Last revised: 12 Jul 2010
There are 2 versions of this paper
How Legal Environments Affect the Use of Bond Covenants
How Legal Environments Affect the Use of Bond Covenants
Date Written: July 12, 2010
Abstract
We examine how country-level legal and institutional investor protection shapes contractual creditor protection. Using debt covenant information for foreign bonds issued in the U.S., we find that bonds of firms incorporated in countries with stronger creditor rights use fewer covenants. This finding suggests that creditor protection substitutes for covenants in reducing the agency cost of debt. In contrast, bonds of firms from countries with stronger shareholder rights use more covenants. Similarly, we find that firms with stronger firm-level corporate governance include more covenants in debt contracts. These findings support the view that firms with stronger shareholder control may face an increase in the shareholder-bondholder conflict and therefore prefer to use more covenants. In addition, we find that the enforcement of laws is positively related to the use of covenants, while the existence of a public credit registry mechanism is negatively related to covenant use.
Keywords: Covenants, contracts, creditor rights, shareholder rights, corporate governance
JEL Classification: G38, K22
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Political Rights and the Cost of Debt
By Yaxuan Qi, John K. Wald, ...
-
Property Rights Protection, Corporate Transparency, and Growth
By Art Durnev, Vihang R. Errunza, ...
-
Property Rights Protection, Corporate Transparency, and Growth
By Art Durnev, Vihang R. Errunza, ...
-
Is Political Risk Company-Specific? The Market Side of the Yukos Affair
By Alexei Goriaev and Konstantin Sonin
-
Expropriation Risk and Firm Growth: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
Expropriation Risk and Firm Growth: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
The Resource Curse: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
The Dynamic Volume-Return Relationship of Individual Stocks: The International Evidence
By Louis Gagnon, George Andrew Karolyi, ...