The Cost of Bond Covenant Restrictions on the Disposition of Assets

Mary M. Pashley, C.R. Krishnaswamy and Erika W. Gilbert

Journal of Business Finance & Accounting, 1997, vol. 24, issue 1, 85-96

Abstract: The cost of bond covenants restricting the dispositions of assets are examined in this study. Using an option pricing framework, it is shown that the cost of compliance could be high if restrictions are placed on the sale of common stock holdings. Similar results can be obtained by using a simple cash flow approach when calculating the effect on restrictions on the sale of depreciable assets. These costs somewhat offset the tax advantages of debt.

Date: 1997
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