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Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

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  • MATTHEW T. BILLETT
  • TAO-HSIEN DOLLY KING
  • DAVID C. MAUER

Abstract

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large-sample evidence of the incidence of covenants in public debt and construct firm-level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms. Copyright 2007 by The American Finance Association.

Suggested Citation

  • Matthew T. Billett & Tao-Hsien Dolly King & David C. Mauer, 2007. "Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants," Journal of Finance, American Finance Association, vol. 62(2), pages 697-730, April.
  • Handle: RePEc:bla:jfinan:v:62:y:2007:i:2:p:697-730
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