Title

Debt covenant violation, competition and cost of new debt

Source of Publication

Australian Journal of Management

Abstract

© The Author(s) 2018. This article empirically shows that the cost of new debt is higher for firms that commit covenant violations. Using a proxy for product market competition to capture exogenous changes to a firm’s competitive environment, I find that the cost is systematically higher for firms that operate in competitive markets. Moreover, I identify channels through which violations can increase the cost of new debt, namely, the incidence, timing and frequency effects, and I document these effects to be more acute for competitive markets. Overall, the study finds that the market prices financial contracts by taking into account the information content of the violation and the risk arising from market competition. JEL Classification: G12, G30.

Document Type

Article

First Page

163

Last Page

187

Publication Date

5-1-2019

DOI

10.1177/0312896218805789

Author First name, Last name, Institution

Umar Butt, Zayed University

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