Publication Type
Working Paper
Publication Date
5-2018
Abstract
Coordination failure among owners of heterogeneous debt types increases distress costs. Covenants reduce expected distress costs by lowering the probability of liquidity shortages, increasing liquidation values, and incentivizing creditor monitoring. We predict and find that new debt contracts include more covenants when borrowers' existing debt structures are more heterogeneous. Our findings suggest that covenants are not only used to address creditor-shareholder conflicts but also to reduce the expected costs of coordination failure among creditors. Further, our results indicate a dynamic component missing from static debt structure models: Debt heterogeneity entails additional covenants (i.e., constraints) when raising future debt.
Keywords
Debt Heterogeneity, Debt Covenants, Creditor Conflicts, Coordination Failure
Discipline
Corporate Finance | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
65
Identifier
10.2139/ssrn.2297804
Citation
LOU, Yun and OTTO, Clemens A..
Debt heterogeneity and covenants. (2018). 1-65.
Available at: https://ink.library.smu.edu.sg/soa_research/1754
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.2297804