The Costs of Debt Contracts and the Repeated Use of Debt Covenants. (16th December 2018)

• Record Type: Journal Article
• Authors: Kim, Bong Hwan
• Is Part Of: Asia-Pacific journal of financial studies. Volume 47:Number 6(2018:Dec.)
• Page Start: 858
• Page End: 880
• Publication Date: 2018-12-16
• Subjects: Debt contracts -- Financial covenants -- Informativeness -- Costs of contracts; Pacific Area -- Economic conditions -- Periodicals; Finance -- Asia -- Periodicals; Finance -- Pacific Area -- Periodicals; Asia -- Economic conditions -- Periodicals; 332.09505
• DOI: 10.1111/ajfs.12240
• Languages: English
• ISSNs: 2041-9945

Abstract

Abstract: I examine the tendency to repeatedly use the same financial covenant in debt contracts and the economic determinants of such repeated use. Using the Dealscan database, I find a tendency to repeatedly use the same financial covenant. I also find that this tendency becomes stronger when a lender has high search costs for an informative covenant or high negotiation costs. I further find that this tendency becomes weaker when a borrower has a high risk of default. My study provides evidence that the cost of writing a contract is economically meaningful and needs to be considered to avoid overstating the effect of accounting informativeness on covenant choice.