Finance and Credit
 

Abstracting and Indexing

РИНЦ
Referativny Zhurnal VINITI RAS
Worldcat
LCCN Permalink
Google Scholar

Online available

EBSCOhost
Eastview
Elibrary
Biblioclub

Archiving

Cyberleninka (12 month OA embargo)

The influence of covenant protection on yield of corporate bond

Vol. 21, Iss. 7, FEBRUARY 2015

PDF  Article PDF Version

Available online: 9 February 2015

Subject Heading: CORPORATE FINANCE

JEL Classification: 

Pages: 34-44

Zadorozhnaya A.N. Omsk State Transport University, Omsk, Russian Federation
anna_zador@mail.ru

The article presents the results of empirical study of how covenant protection affects the cost of debt. Covenants can mitigate risk-shifting problem in agency conflicts, but also they may influence on corporate financial policy by reducing the cost of debt. The aim of the study is to test the costly contracting hypothesis (CCH) both in domestic corporate bond market and in Eurobond market. The extant research on agency theory of covenants (ATC) relies on the data from the US and other developed countries. Due to the fact that the institutional environment affects the nature of financial contract, it is necessary to extend empirical evidence from developing markets. The hypothesis is tested with regression models using ordinary least squares (OLS) and fixed effect regression. The study is based on panel data. The sample is formed by data for 200 Russian public nonfinancial companies that place bonds both in domestic and Eurobond market during 2008-2013. The obtained research results demonstrate that a negative relation between offering yield and the presence of covenants which is consistent with the costly contracting hypothesis (CCH) is registered only in Eurobond market. These results suggest some policy implication. Covenant provisions included in indenture agreements should be tailored to take into account firms' and issues' characteristics. Analysis of covenant protection contained in bond indentures could be included as a criteria in credit rating assessment.

Keywords: agency theory, debtholder-shareholder conflict, covenants, costly contracting hypothesis

References:

  1. Bazzana F., Broccardo E. The Covenant Threshold in Public and Private Debt. Banca Impresa Società, 2013, no. 32, pp. 3–24.
  2. Bazzana F., Palmieri M. How to increase the efficiency of bond covenants: a proposal for the Italian corporate market. European Journal of Law and Economics, 2012, vol. 34, рр. 327–346.
  3. Billett M., King T.-H.D., Mauer D. Growth opportunities and the choice of leverage, debt maturity, and covenants. The Journal of Finance, 2007, vol. 62, pp. 697–730.
  4. Bradley M., Roberts M. The structure and pricing of corporate debt covenants. Duke University Working Paper, 2004.
  5. Chava S., Kumar P., Warga A. Agency costs and the pricing of bond covenants. University of Houston Working Paper, 2004.
  6. Chava S., Kumar P., Warga A. Managerial Agency and Bond Covenants. Review of Financial Studies, 2010, no. 23, pp. 1120–1148.
  7. Correira M.D.R. The choice of maturity and additional covenants in debt contracts: A panel data approach. Research in International Business and Finance, 2008, no. 22, pp. 284300.
  8. Dichev I.D., Skinner D.J. Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 2002, no. 40, pp. 1091–1123.
  9. Goyal V.K. Market discipline of bank risk: Evidence from subordinated debt contracts. Journal of Financial Intermediation, 2005, vol. 14, pp. 318–350.
  10. Igawa K., Kanatas G. Asymmetric Information, Collateral, and Moral Hazard. Journal of Financial and Quantitative Analysis, 1990, no. 25, pp. 469490.
  11. Jensen M., Meckling W. Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 1976, vol. 3, no. 4, pp. 305–360.
  12. Kwan S.H., Carleton W.T. Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds. Journal of Money, Credit and Banking, 2010, no. 42, pp. 907–929.
  13. Myers St. Determinants of corporate borrowing. Journal of Financial Economics, 1977, no. 5, pp. 147–175.
  14. Nini G., Smith D.C., Sufi A. Creditor Control Rights, Corporate Governance, and Firm Value. Review of Financial Studies, 2012, no. 25, pp. 1713–1761.
  15. Niskanen J., Niskanen M. Covenants and small business lending: The Finnish case. Small Business Economics, 2004, no. 23, pp. 137–149.
  16. Reisel N. On the value of restrictive covenants: an empirical investigation of public bond issues. Southern Methodist University Working Paper, 2004.
  17. Smith C.W., Warner J.B. On financial contracting. An analysis of bond covenants. Journal of Financial Economics, 1979, vol. 7, pp. 117–161.
  18. Tanigawa Y., Katsura S. Covenants and collateral in Japanese corporate straight bonds: choice and yield spread. World Finance Conference Working Paper, 2014.
  19. Wei C. Covenant protection, credit spread dynamics and managerial incentives. NYU Working Paper, 2005.
  20. White H. A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 1980, no. 48, pp. 817–838.

View all articles of issue

 

ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

Journal current issue

Vol. 25, Iss. 10
October 2019

Archive