Corporate Bondholder Reactions to Bank Loan Covenant Violations and the Evolution of Bank Loan Covenants

This paper examines firms’ corporate bond price reactions to bank loan covenant violations. Using an event study approach, we find that response is marginally negative in the 1990s and becomes significantly positive 2000s. The suggest bondholders benefit from violations more recent years. Specifically, enable banks step take necessary actions protect creditors’ interests, which not only private lenders but also public bondholders. In addition, temporal change suggests disciplining role of covenants increasingly important years: gradually debt as “trip wires”, give option when early warning signal shows up through Furthermore, stockholder are positively correlated years, managerial entrenchment could decrease banks’ influence after