The Screening Role of Covenant Heterogeneity
成果类型：
Article
署名作者：
Armstrong, Christopher S.; Gallimberti, Carlo Maria; Tsui, David
署名单位：
Stanford University; Analysis Group Inc.; Boston College; Analysis Group Inc.
刊物名称：
ACCOUNTING REVIEW
ISSN/ISSBN：
0001-4826
DOI：
10.2308/TAR-2021-0277
发表日期：
2025
页码：
27-53
关键词：
摘要：
We investigate whether differences in the mix of financial covenants in debt contracts (i.e., covenant heterogeneity) reflect-and provide a way for lenders to elicit, or screen-borrowers' pre-contractual private information about their future risk profile. Consistent with adverse selection theories, we predict and find that borrowers with higher future risk negotiate loans with covenants that are less sensitive to performance, compared to borrowers with lower future risk. We differentiate between screening and incentive explanations for this finding and provide evidence that screening accounts for a substantial portion of this overall relation. Our study highlights how, in addition to shaping borrowers' incentives through monitoring, covenant heterogeneity reflects borrowers' future risk profiles and can help lenders screen accordingly.
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