How legal environments affect the use of bond 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)235-262
Journal / PublicationJournal of International Business Studies
Volume42
Issue number2
Publication statusPublished - Feb 2011
Externally publishedYes

Abstract

We examine how country-level legal and institutional investor protection shapes contractual creditor protection. We examine debt covenant information from foreign corporate bonds issued in the US from more than 50 countries between 1991 and 2007. We find that bonds of firms incorporated in countries with stronger creditor rights use fewer covenants. This finding suggests that creditor protection substitutes for covenants in reducing the agency cost of debt. In contrast, bonds of firms with stronger shareholder rights or firms with stronger firm-level corporate governance use more covenants. These findings support the notion that firms with stronger shareholder control may face an increase in the shareholder-bondholder conflict and therefore prefer to use more covenants. However, greater shareholder rights are not associated with the use of more covenant restrictions on equity issuance, as firms with greater minority shareholder protection are unlikely to suffer such equity dilution. © 2011 Academy of International Business All rights reserved.

Research Area(s)

  • contracts, corporate governance, covenants, creditor rights, shareholder rights

Citation Format(s)

How legal environments affect the use of bond covenants. / Qi, Yaxuan; Roth, Lukas; Wald, John K.
In: Journal of International Business Studies, Vol. 42, No. 2, 02.2011, p. 235-262.

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