Creditor Dispersion and Debt Covenants

Yun Lou () and Clemens Otto
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Yun Lou: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique
Clemens Otto: SIS - Singapore Management University

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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 (search for similar items in EconPapers)
Date: 2013-07-25
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02058256

DOI: 10.2139/ssrn.2297804

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