Debt Covenants and Corporate Governance
Annual Review of Financial Economics Vol. 11:197-219 (Volume publication date December 2019)
Posted: 9 Mar 2020
Date Written: 2019
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 post violation 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.
Keywords: debt covenants, corporate finance, corporate governance, covenant violations, control rights
JEL Classification: G32, G33
Suggested Citation: Suggested Citation