Managerial Optimism and Debt Covenants

Asset Substitution, Debt Covenants and Conservatism

Accounting Quality, Debt Covenants Design, and the Cost of Debt

We examine whether the presence of alternative debt covenant designs (threshold tightness, covenants frequency and covenant interdependence) reduces the adverse effect of poor accounting quality on debt cost in the private lending market. Our results indicate that when lenders face borrowing firms characterized by low accounting quality (hereafter, low quality borrowers), the lender tends to in...

Design and Renegotiation of Debt Covenants

We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where managers are better informed than the lenders regarding potential transfers from debt to equity that are associated with future investments. We show that this simple adverse-selectio...

Financial Accounting Characteristics and Debt Covenants

We examine the relation between financial accounting characteristics and accountingbased debt covenants. We hypothesize that use of accounting-based covenants is more likely when asymmetric timeliness is higher and accounting discretion is reduced, because the covenants can more efficiently reduce agency costs in these circumstances. Overall, we find little association between the use of accoun...

Managerial Optimism and Investment Choice

This paper analyzes whether it might be desir~ble for a firm to hire an overoptimistic manager to commit to a certain R&D strategy. I consider a Cournot model with an ex-ante R&D stage where firms can invest in cost reduction before product market competition takes place. I show that firms want to hire overoptimistic managers and argue that a manager's type may serve as a substitute for strateg...