Debt Covenants and Corporate Acquisitions

68 Pages Posted: 19 Nov 2018

See all articles by Mai Daher

Mai Daher

American University of Beirut; London School of Economics & Political Science (LSE); Imperial College London

Ahmad Ismail

American University of Beirut

Date Written: November 1, 2018


We investigate the impact of debt covenants on acquisition characteristics. We find that acquirers with covenants pay lower merger premiums, make more focused acquisitions, and engage in acquisitions with higher synergy gains and higher acquirer returns around deal announcement, relative to those without. All these results are more pronounced with stricter debt covenants. Additionally, acquirers with covenants pay with a lower share fraction. In particular, capital covenants, which restrict debt issuance, are positively related to the share fraction, while performance covenants, which affect the stock of equity capital, result in a lower share fraction of payment. All our results hold only for acquirers who have not violated covenants, reemphasizing the importance of debt covenants and the threat they entail on corporate policies even before nearing violation states. Results also, generally, hold for badly governed firms, suggesting that creditors’ monitoring role through debt covenants and borrower’s effective corporate governance are substitutes.

Keywords: acquisitions, debt covenants, control rights, premium, payment method

JEL Classification: G34, G32

Suggested Citation

Daher, Mai and Ismail, Ahmad, Debt Covenants and Corporate Acquisitions (November 1, 2018). Journal of Corporate Finance, Forthcoming, Available at SSRN:

Mai Daher

American University of Beirut ( email )

Beirut, 0236

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Ahmad Ismail (Contact Author)

American University of Beirut ( email )

Bliss Street
Olayan School of Business
Beirut, POB 11236


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