Bond covenants, bankruptcy risk, and the cost of debt

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Article number101799
Journal / PublicationJournal of Corporate Finance
Volume66
Online published21 Nov 2020
Publication statusPublished - Feb 2021

Abstract

Are all covenants equally effective at reducing the bondholder-shareholder conflict? Examining the most frequently used bond covenants, we document that four out of 24 restrictions are associated with significantly higher bankruptcy risk. The use of these Default Indicating covenants can be partly explained by faulty contract design, greater recovery in bankruptcy, or within-creditor conflicts. Firms that use In-House Counsel to help structure their bond issue and those that use Big 4 Auditors are also less likely to include Default Indicating covenants in their bonds. Further tests show that the use of these Default Indicating covenants is associated with higher bond and CDS spreads. Overall, the results help explain the prior evidence on the relation between covenant use and the cost of debt.

Research Area(s)

  • Bankruptcy risk, Bond covenants, Cost of debt, Survival analysis

Bibliographic Note

Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).

Citation Format(s)

Bond covenants, bankruptcy risk, and the cost of debt. / Mansi, Sattar A.; Qi, Yaxuan; Wald, John K.

In: Journal of Corporate Finance, Vol. 66, 101799, 02.2021.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review