The Rise of Covenant-Lite Bond Contracting

We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on potential benefits as basis for debt contracting, little is known about settings where it may be optimal to exclude statistics from public contracts. find cov-lite bonds higher turnover lower spreads. Our findings provide empirical support theory, predicts, covenant design, trade-off between improving ease versus enhanced investor protection needs managed. These results enhance our understanding limits accounting’s role in (bond) contracting design.