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The Cost of Bond Covenant Restrictions on the Disposition of Assets

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  • Mary M. Pashley
  • C.R. Krishnaswamy
  • Erika W. Gilbert

Abstract

The cost of bond covenants restricting the dispositions of assets are examined in this study. Using an option pricing framework, it is shown that the cost of compliance could be high if restrictions are placed on the sale of common stock holdings. Similar results can be obtained by using a simple cash flow approach when calculating the effect on restrictions on the sale of depreciable assets. These costs somewhat offset the tax advantages of debt.

Suggested Citation

  • Mary M. Pashley & C.R. Krishnaswamy & Erika W. Gilbert, 1997. "The Cost of Bond Covenant Restrictions on the Disposition of Assets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(1), pages 85-96, January.
    • Handle: RePEc:bla:jbfnac:v:24:y:1997:i:1:p:85-96
    DOI: 10.1111/1468-5957.00096
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    Cited by:

    1. Marco Realdon, 2007. "Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 950-975, June.
    2. Marco Realdon, 2006. "Valuation of the Firm's Liabilities when Equity Holders are also Creditors," Discussion Papers 06/16, Department of Economics, University of York.

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