State Laws and Debt Covenants

Posted: 7 Nov 2006

See all articles by Yaxuan Qi

Yaxuan Qi

City University of Hong Kong (CityU) - Department of Economics & Finance

John K. Wald

University of Texas at San Antonio

Abstract

We examine whether state laws impact the use of debt covenants using a sample of U.S. public bond issues from 1987 to 2004. We consider variation in state laws with respect to the minimum asset/debt ratio necessary for a payout and with respect to antitakeover statutes. We find that firms incorporated in states with stricter restrictions on distributions are less likely to include debt covenants which constrain payouts, limit additional debt, or restrict the sale of assets. Thus state payout restrictions appear to substitute for the use of these debt covenants. On the other hand, firms incorporated in states with stronger antitakeover statutes are somewhat more likely to use debt covenants. This finding is consistent with the notion that firms with antitakeover protection are more likely to suffer from agency problems, and hence are more likely to use debt covenants to minimize agency costs.

Keywords: state laws, covenants, payout restrictions, agency costs

JEL Classification: G35, K22

Suggested Citation

Qi, Yaxuan and Wald, John K., State Laws and Debt Covenants. Journal of Law and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=940067

Yaxuan Qi

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

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