Event risk covenants

Thomas Heidorn, Oliver Jaster and Ulrich Willeitner

No 30, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: Merger and acquisition activities can have a strong impact on the capital structure of the companies involved and therefore on the value of debt. This paper discusses the role of covenants within debt contracts. Using the Real Option approach to quantify the implications of covenants on the value of the company, it can be shown that covenants do not necessarily reduce the risk of debt lender. The value of the company is determined by assets in place and management decisions in the future. Any limitation of the management might reduce the value of the company and therefore the value of debt.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fsfmwp:30

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