The Market Response to Implied Debt Covenant Violations

Debt covenant slack and real earnings management

We examine the relation between firms’ real earnings management decisions and the slack in their net worth debt covenant. Using private debt covenant data, we find that the overall level of real earnings management is higher when net worth covenant slack is tighter. Moreover, we find that this effect is more pronounced for loan-years with the tightest slack, which is a setting where benefits of...

Debt Covenant Design and Creditor Control Rights: Evidence from Covenant Restrictiveness and Loan Outcomes

Using three measures of covenant restrictiveness, I examine the association between the ex ante design of debt covenant restrictiveness and the ex post exercise of creditor control rights. I find that contracts with higher level of covenant restrictiveness at loan origination are more likely to subsequently experience both covenant violations and renegotiations, suggesting that stricter covenan...

Corporate Acquisitions Around Time Periods of Loan Covenant Violations

We present empirical evidence on acquirer firms that have violated or are about to violate a loan covenant within four quarters of undergoing an acquisition. We find that firms that violate a covenant within the four quarters before the acquisition announcement have the highest announcement period abnormal returns, while firms that violate a covenant within the four quarters after the acquisiti...

Response to Consultation Paper, Towards an Anglican Covenant (TAC)

Market - Based Debt - Reduction Schemes

Recently much attention has been given to the idea of reducing the debt of developing countries through a "menu approach" of schemes that attempt to harness the discounts on debt in the secondary market. This paper, after reviewing the rationale for the orthodox strategy of concerted lending and the case for debt forgiveness, examines the logic behind several market-based debt reduction schemes...