Measuring the Probability of Financial Covenant Violation in Private Debt Contracts

41 Pages Posted: 13 Mar 2013 Last revised: 5 Nov 2015

See all articles by Peter R. Demerjian

Peter R. Demerjian

University of Washington - Michael G. Foster School of Business

Edward Owens

University of Utah - David Eccles School of Business

Date Written: November 4, 2015

Abstract

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

Demerjian, Peter R. and Owens, Edward, Measuring the Probability of Financial Covenant Violation in Private Debt Contracts (November 4, 2015). Journal of Accounting & Economics (JAE), Vol. 61, No. 2-3, 2016. Available at SSRN: https://ssrn.com/abstract=2232880 or http://dx.doi.org/10.2139/ssrn.2232880

Peter R. Demerjian (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Edward Owens

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
508
rank
52,923
Abstract Views
2,107
PlumX Metrics