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Financial covenants in the markets for public and private debt

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  • Paul Mather
  • Graham Peirson
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    Abstract

    The public debt contracts surveyed in Whittred and Zimmer (1986) and Stokes and Tay (1988) were issued between 1962 and 1985, and there has been significant macroeconomic, institutional and regulatory change since that time. We analyse a sample of 36 recently issued Australian public debt contracts and document a considerable change in the 'package' of financial covenants used in public debt contracts. The covenant package is now less restrictive and the types of covenants used are more heterogenous. We also survey a sample of 41 recent Australian private debt contracts. These contracts contain a greater number, variety and, collectively, more restrictive set of financial covenants than those public debt contracts we survey, supporting theory which suggests that covenant restrictive and renegotiation-flexible contracts are more suited to borrowers contracting with financial intermediaries in private debt markets. We also note differences in accounting rules associated with financial covenants used in these private debt contracts. Copyright The Authors Journal compilation (c) 2006 AFAANZ.

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    Bibliographic Info

    Article provided by Accounting and Finance Association of Australia and New Zealand in its journal Accounting and Finance.

    Volume (Year): 46 (2006)
    Issue (Month): 2 ()
    Pages: 285-307

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    Handle: RePEc:bla:acctfi:v:46:y:2006:i:2:p:285-307

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    Cited by:
    1. Flavio Bazzana & Marco Palmieri, 2012. "How to increase the efficiency of bond covenants: a proposal for the Italian corporate market," European Journal of Law and Economics, Springer, vol. 34(2), pages 327-346, October.
    2. Brockman, Paul & Unlu, Emre, 2009. "Dividend policy, creditor rights, and the agency costs of debt," Journal of Financial Economics, Elsevier, vol. 92(2), pages 276-299, May.
    3. Flavio Bazzana & Luigi Mittone & Luciano Andreozzi, 2012. "The freeze-out bond exchange offer. An experimental approach," CEEL Working Papers 1204, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.

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