Debt Covenants, Agency Costs and Debt Maturity

44 Pages Posted: 20 Jun 2019

See all articles by Jamie Alcock

Jamie Alcock

University of Oxford

Frank Finn

University of Queensland

Kelvin Jui Keng Tan

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: June 14, 2019

Abstract

Corporate debt maturity is a concave function of financial leverage when the debt has restrictive asset-based covenants attached. This concavity kicks in earlier with increasing covenant tightness and is absent when firms have no restrictive asset-based covenants. We argue that this concavity is suboptimal for equityholders and will arise if managers' prioritize maintaining firm control over reducing the firm's cost of capital. Managers of highly levered firm choose shorter-term debt (at a higher cost) to reduce the probability of covenant violation. We also find that maturity-leverage concavity is reduced when executive remuneration contracts better align managers and owners' interests.

Keywords: Debt Covenants, Debt Maturity, Leverage, Capital Structure, Agency Costs

JEL Classification: G32, G33, G34

Suggested Citation

Alcock, Jamie and Finn, Frank and Tan, Kelvin Jui Keng, Debt Covenants, Agency Costs and Debt Maturity (June 14, 2019). Available at SSRN: https://ssrn.com/abstract=3403989 or http://dx.doi.org/10.2139/ssrn.3403989

Jamie Alcock

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Frank Finn

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Kelvin Jui Keng Tan (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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