Debt Covenants and Cross-Sectional Equity Returns

Jean Helwege (), Jingzhi Huang and Yuan Wang ()
Additional contact information
Jean Helwege: University of California, Riverside, Riverside, California 92521
Yuan Wang: Concordia University, Montréal, Quebec H3G 1M8, Canada

Management Science, 2017, vol. 63, issue 6, 1835-1854

Abstract: This paper investigates the impact of debt covenant protection on the cross section of equity returns with a firm-level covenant index and four subindices. We find that firms with weaker covenant protection (lower covenant index levels) earn significantly higher risk-adjusted equity returns than do those firms with greater covenant protection. These results are stronger for covenant indices that are related to investments, subsequent financing, and event risk. The difference between high and low covenant index stocks is more pronounced when agency problems between shareholders and debtholders are more severe, suggesting that the covenant effect arises from an inability to control shareholder risk taking.

Keywords: debt covenants; cross section of stock returns; covenant factor; agency costs of debt (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2015.2381 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:6:p:1835-1854

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().