Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants

Zhipeng Zhang ()

MPRA Paper from University Library of Munich, Germany

Abstract: For U.S. firms from 1988 to 2007, firms with stricter loan covenants had higher firm-level default recovery rates. Covenants were stricter, moreover, when set during downturns in the business cycle. This implies a negative dependence of recovery rates on lagged macroeconomic conditions. That is, bank loan contracts established in economic recessions have tight covenants, leading later to higher recovery rates. My empirical evidence suggests that private creditors have significant influence on firms' bankruptcy decisions through the channel of covenants in debt contracts.

Keywords: Recovery rate; Bankruptcy; Loan covenant; Creditor control; Business cycle (search for similar items in EconPapers)
JEL-codes: E32 G21 G32 G33 (search for similar items in EconPapers)
Date: 2009-09-02
New Economics Papers: this item is included in nep-bec, nep-mac and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17521

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