COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS

Michael Dothan

Journal of Financial Research, 2006, vol. 29, issue 2, 147-162

Abstract: Creditors routinely impose on a borrowing firm a minimum interest coverage ratio that the firm has to maintain. I show that nonlinear costs of financial distress provide a possible explanation of why firms find it optimal to have an interest coverage ratio covenant in their debt indenture, even in the absence of information asymmetries or agency costs.

Date: 2006
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