Measuring the Probability of Financial Covenant Violation in Private Debt Contracts
41 Pages Posted: 13 Mar 2013 Last revised: 5 Nov 2015
Date Written: November 4, 2015
We measure the probability that a borrower will violate financial covenants in private debt contracts. We analyze hand-coded data and specify standard covenant definitions using Compustat data that minimize measurement error for all individual Dealscan covenants. We use these definitions to create a measure of aggregate probability of violation, which can be used across all covenants in a loan or among covenant subsets of interest. We provide evidence that our aggregate probability measure is superior to alternatives used in prior literature.
Keywords: Debt covenants; Dealscan; Covenant violation
JEL Classification: M41
Suggested Citation: Suggested Citation