Debt Heterogeneity and Covenants

Yun Lou () and Clemens A. Otto ()
Additional contact information
Yun Lou: School of Accountancy, Singapore Management University, Singapore 178900;
Clemens A. Otto: Lee Kong Chian School of Business, Singapore Management University, Singapore 178899

Management Science, 2020, vol. 66, issue 1, 70-92

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. Furthermore, 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 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2018.3141 (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:66:y:2020:i:1:p:70-92

Access Statistics for this article

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