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Private vs. Public Lending: Evidence from Covenants

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Author Info
Marcel Kahan (New York University)
Bruce Tuckman (Stern School of Business and Anderson School of Management)
Abstract

This paper compares the terms of 63 privately-placed debt agreements with those found in public bond indentures. The main results of the analysis are as follows: 1) Private agreements more aggressively control the actions of equity holders by setting various covenants more tightly, by contrasting on quantities that are volatile and not under the direct control of managers, and by using relatively vague terminology. This finding does not rely on credit quality differences between the public and private debt markets. Furthermore, covenant differences between investment grade and junk issues are less pronounced in the private market than in the public market. 2) Private agreements provide lenders with the means to monitor borrowers more carefully. 3) Private agreements attempt to control intra-claim conflicts, i.e. those arising between holders of the same bond issue. 4) Private agreements payment terms are tailored to suit lenders by avoiding embedded interest rate options.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1152&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1152.

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Date of creation: 01 Jul 1993
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Handle: RePEc:cdl:anderf:1152

Note: oai:cdlib1:anderson/fin-1152
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Mark Carey S. & Stephen Prowse & John Rea & Gregory Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  3. Andrew Kalotay & Bruce Tuckman, 1992. "Sinking Fund Prepurchases and the Designation Option," Financial Management, Financial Management Association, vol. 21(4), Winter.
  4. Kalay, Avner, 1982. "Stockholder-bondholder conflict and dividend constraints," Journal of Financial Economics, Elsevier, vol. 10(2), pages 211-233, July. [Downloadable!] (restricted)
  5. Mark S. Carey & Stephen D. Prowse & John D. Rea, 1993. "Recent developments in the market for privately placed debt," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 77-92.
  6. Kahan, Marcel & Tuckman, Bruce, 1993. "Do Bondholders Lose from Junk Bond Covenant Changes," Journal of Business, University of Chicago Press, vol. 66(4), pages 499-516, October. [Downloadable!] (restricted)
  7. El-Gazzar, Samir & Pastena, Victor, 1990. "Negotiated accounting rules in private financial contracts," Journal of Accounting and Economics, Elsevier, vol. 12(4), pages 381-396, March. [Downloadable!] (restricted)
  8. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June. [Downloadable!] (restricted)
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  1. Mark Carey & Mitch Post & Steven A. Sharpe, 1996. "Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting," Finance and Economics Discussion Series 96-25, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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