State laws and debt covenants

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)179-207
Journal / PublicationJournal of Law and Economics
Volume51
Issue number1
Publication statusPublished - Feb 2008
Externally publishedYes

Abstract

We examine whether state laws impact the use of debt covenants by 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-to-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 that constrain payouts, limit additional debt, or restrict the sale of assets. Thus, state payout restrictions appear to be a 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, thus, are more likely to use debt covenants to minimize agency costs. © 2008 by The University of Chicago. All rights reserved.

Citation Format(s)

State laws and debt covenants. / Qi, Yaxuan; Wald, John.
In: Journal of Law and Economics, Vol. 51, No. 1, 02.2008, p. 179-207.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review