The Rise of Covenant-Lite Bond Contracting

Forthcoming, Journal Of Accounting Auditing and Finance

Posted: 3 Feb 2021

See all articles by Miles B. Gietzmann

Miles B. Gietzmann

Bocconi University - Department of Accounting

Helena Isidro

ISCTE-IUL Instituto Universitario de Lisboa

Ivana Raonic

City University London - Sir John Cass Business School

Date Written: February 1, 2021

Abstract

We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory, which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design.

Keywords: Debt Contracting, Covenants

JEL Classification: G32

Suggested Citation

Gietzmann, Miles B. and Isidro, Helena and Raonic, Ivana, The Rise of Covenant-Lite Bond Contracting (February 1, 2021). Forthcoming, Journal Of Accounting Auditing and Finance, Available at SSRN: https://ssrn.com/abstract=3777119

Miles B. Gietzmann (Contact Author)

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Helena Isidro

ISCTE-IUL Instituto Universitario de Lisboa

Av. das Forças Armadas
Lisboa, 1649-026
Portugal

Ivana Raonic

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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