Debt Covenants and Corporate Governance

Posted: 12 Jan 2020

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Shunlan Fang

Kent State University

Praveen Kumar

University of Houston - Department of Finance

Saumya Prabhat

Federal Home Loan Mortgage Corporation (FHLMC)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

We review the recent theoretical and empirical literature on debt covenants with a particular focus on how creditor governance after covenant violations can influence the borrower's corporate policies. From the theoretical literature, we identify the key trade-offs that help explain the observed heterogeneity in covenant types, inclusion, likelihood of violation, and postviolation renegotiation flexibility. Empirically, we first review the literature that deals with ex ante evidence on covenant design and the various factors that influence covenant design; we next review the ex post evidence on the impact of technical covenant violations on the borrower. We then discuss limitations of the existing theoretical and empirical studies and conclude with some directions for future research in this burgeoning area.

Suggested Citation

Chava, Sudheer and Fang, Shunlan and Kumar, Praveen and Prabhat, Saumya, Debt Covenants and Corporate Governance (December 2019). Annual Review of Financial Economics, Vol. 11, pp. 197-219, 2019. Available at SSRN: https://ssrn.com/abstract=3516525 or http://dx.doi.org/10.1146/annurev-financial-110716-032511

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Shunlan Fang

Kent State University ( email )

Kent, OH 44242
United States

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Saumya Prabhat

Federal Home Loan Mortgage Corporation (FHLMC)

8200 Jones Branch Road
McLean, VA 22101
United States

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