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How to increase the efficiency of bond covenants: a proposal for the Italian corporate market

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  • Flavio Bazzana

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  • Marco Palmieri

    ()

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    Abstract

    Covenants are particular clauses in the debt contracts of firms that restrict business policy, giving creditors the possibility of putting precise actions into force (normally early repayment) when the covenants are violated. The main purpose of covenants given in the literature is to resolve the conflicts of interest between shareholders and bondholders. Lack of coordination between bondholders may, however, reduce the efficiency of these instruments. We propose an application of the Italian law allowing the insertion of a mandatory representation into the new financial hybrid contracts to give an investment firm the right to act with full power on behalf of the bondholders. We show the impact of this proposal using a formalised example for the issuance of a bond with a covenant for a firm. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s10657-010-9210-y
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    Bibliographic Info

    Article provided by Springer in its journal European Journal of Law and Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 2 (October)
    Pages: 327-346

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    Handle: RePEc:kap:ejlwec:v:34:y:2012:i:2:p:327-346

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    Web page: http://www.springerlink.com/link.asp?id=100264

    Related research

    Keywords: Bond covenants; Bondholder’s trustee; G12; K22; G32;

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    Cited by:
    1. 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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