Uncertainty and debt covenants

• 成果类型: Article
• 署名作者: Demerjian, Peter R.
• 署名单位: University of Washington; University of Washington Seattle
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-017-9409-z
• 发表日期: 2017
• 页码: 1156-1197
• 关键词: investment opportunity set; INFORMATION UNCERTAINTY; Accounting information; Bank debt; CONTRACTS; QUALITY; CHOICE; RISK; RENEGOTIATION; determinants

摘要

I examine the use of financial covenants when contracting for debt under uncertainty. Uncertainty, in the context of this study, is a lack of information about future economic events and their consequences for the borrower's creditworthiness. I examine the implications of ex ante uncertainty that is resolved by information received following loan initiation but prior to maturity. I argue that financial covenants, by transferring control rights ex post, provide a trigger for creditor-initiated renegotiation when the borrower is revealed to be of low credit quality. Using a large sample of private loans, I predict and find that financial covenant intensity is associated with greater uncertainty. I also revisit the agency-based explanation for covenant use and find that this uncertainty explanation is robust to various controls for agency conflicts.