Costs of Financial Distress and Interest Coverage Ratios

Posted: 22 Mar 2005

See all articles by Michael U. Dothan

Michael U. Dothan

Willamette University - Atkinson Graduate School of Management

Abstract

Creditors routinely impose on a borrowing firm a minimum interest coverage ratio that the firm has to maintain. I show that nonlinear costs of financial distress provide a possible explanation of why firms find it optimal to have an interest coverage ratio covenant in their debt indenture, even in the absence of information asymmetries or agency costs.

Keywords: financial distress, bond covenants

JEL Classification: G12, G32, G33

Suggested Citation

Dothan, Michael U., Costs of Financial Distress and Interest Coverage Ratios. Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=677433

Michael U. Dothan (Contact Author)

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States
(503) 370-6440 (Phone)

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