Debt covenant violation, competition and cost of new debt

Umar Butt, Zayed University

Document Type

Article

Source of Publication

Australian Journal of Management

Publication Date

5-1-2019

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.

ISSN

0312-8962

Publisher

SAGE Publications Ltd

Volume

44

Issue

2

First Page

163

Last Page

187

Disciplines

Business

Keywords

Cost of debt, debt covenant violation, market competition

Scopus ID

85059085335

Indexed in Scopus

yes

Open Access

no

Link to Full Text

Share

COinS