Publication Type
Journal Article
Version
submittedVersion
Publication Date
5-2019
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
Accounting | Corporate Finance
Research Areas
Finance
Publication
Management Science
ISSN
0025-1909
Identifier
10.1287/mnsc.2018.3141
Publisher
INFORMS (Institute for Operations Research and Management Sciences)
Citation
LOU, Yun and OTTO, Clemens A..
Debt heterogeneity and covenants. (2019). Management Science.
Available at: https://ink.library.smu.edu.sg/soa_research/1800
Copyright Owner and License
Authors
Additional URL
https://doi.org/10.1287/mnsc.2018.3141