Role, Structure, and Determinants of Debt Covenants: Evidence from Japan

Takuma Kochiyama and Ryosuke Nakamura

No 187, Working Paper Series from Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University

Abstract: We examine types of financial covenants and how they are used in Japanese loan markets. Since previous literature on covenants focused on US firms, little is known about financial covenants in the so-called bank-oriented countries. We use a hand-collected dataset to explore the (1) types of financial covenants and (2) determinants of the use and strictness of financial covenants. Our binominal regression analysis shows that financial factors such as profitability, leverage, and interest rates affect the use of financial covenants. Most interestingly, we find that factors specific to Japan, dependence on the main bank and foreign shareholder ownership, also affect the use of financial covenants. Furthermore, we present that the borrower’s leverage is a key determinant for the strictness of financial covenants.

Pages: 32 pages
Date: 2014-12
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Citations: View citations in EconPapers (4)

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