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The Cost of Bond Covenant Restrictions on the Disposition of Assets

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  • Mary M. Pashley

    (Department of Economics and Finance, College of Business Administration, Tennessee Technological University,)

  • 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. Copyright Blackwell Publishers Ltd 1997.

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.
  • Handle: RePEc:bla:jbfnac:v:24:y:1997-01:i:1:p:85-96
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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.

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