Similarity in Bond Covenants

67 Pages Posted: 4 Jul 2013 Last revised: 2 Jul 2016

See all articles by Gus De Franco

Gus De Franco

Purdue University

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 Southern California

Date Written: April 14, 2016


We examine the economic consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s dataset on the quality of bond covenants, we develop measures that capture similarity in bond covenant terms by comparing the restrictiveness of a bond’s covenants with the covenant restrictiveness of previously issued peer bonds. Consistent with similarity in covenants reducing bondholders’ contracting and comparability costs, we document that bonds with more similar covenant restrictiveness receive significantly lower yields at issuance. These bonds are also characterized by greater liquidity in the secondary market and are more likely to be held by long-term bond investors, such as insurance companies. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings contracting and comparability cost savings that may be larger than the monitoring benefits provided by covenants with more tailored credit protection.

Keywords: Covenants, Covenant Restrictiveness, Comparability, Similarity, Bond Yields

JEL Classification: G12, G14, G32, M49

Suggested Citation

De Franco, Gus and Vasvari, Florin P. and Vyas, Dushyantkumar and Wittenberg Moerman, Regina, Similarity in Bond Covenants (April 14, 2016). Rotman School of Management Working Paper No. 2288723, Available at SSRN: or

Gus De Franco

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

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 M5S1S4

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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