The Costs of Debt Contracts and the Repeated Use of Debt Covenants. (16th December 2018) - Kim, Bong Hwan
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.