Dynamic threshold values in earnings-based covenants

• 成果类型: Article
• 署名作者: Li, Ningzhong; Vasvari, Florin P.; Wittenberg-Moerman, Regina
• 署名单位: University of Texas System; University of Texas Dallas; University of London; London Business School; University of Southern California
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2015.07.004
• 发表日期: 2016
• 关键词: incomplete contracts; debt; INFORMATION; RENEGOTIATION; COMPETITION; DESIGN

摘要

We examine the role of dynamic covenant threshold values in syndicated loan agreements. We document that 45% of syndicated loans specify dynamic covenant thresholds in earnings-based covenants and that these changing thresholds typically become tighter over the life of a loan. We find that covenants with a tight trend provide an important signaling mechanism that meets the needs of borrowers that experience an inferior financial performance at loan initiation but expect future performance improvements. Specifically, we find that these covenants provide underperforming borrowers with a grace period by requiring less restrictive initial thresholds. At the same time, they allow these borrowers to credibly convey information to lenders about their future prospects via gradually more demanding subsequent thresholds. Our empirical evidence also suggests that while lenders entering into tight threshold trend covenant contracts receive weaker covenant protection over the grace period, they benefit from having stronger control rights in subsequent periods. (C) 2015 Elsevier B.V. All rights reserved.