Debt Covenants and Investment: Response to Gulen, Jens, and Page (2020)

Abstract

In a recent working paper, "An application of causal forest in corporate finance: How does financing affect investment?" Gulen, Jens, and Page, April 23 2020, (GJP) challenge the analysis and several conclusions of our paper, "How Does Financing Impact Investment? The Role of Debt Covenants," 2008, (CR). Specifically, GJP claim that our main results are not robust to a more recent machine learning estimation technique called "causal forest," and that covenant violations only affect investment in a small number of distressed firms. Here we show that these, and other claims made by GJP concerning our study, are incorrect. GJP's results are internally inconsistent, inconsistent with other published studies, and unreproducible. We also provide new evidence using the latest econometric techniques, including that suggested by GJP, and more recent data, all of which show the robustness of our original findings.

Keywords: Covenants, Investment

JEL Classification: G31, G21