IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

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

  • Flavio Bazzana

    ()

  • Marco Palmieri

    ()

Registered author(s):

    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

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://hdl.handle.net/10.1007/s10657-010-9210-y
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

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

    as
    in new window

    Handle: RePEc:kap:ejlwec:v:34:y:2012:i:2:p:327-346
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/journal/10657

    References listed on IDEAS
    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.:

    as in new window
    1. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    2. Hubert, Franz & Schäfer, Dorothea, 2002. "Coordination Failure with Multiple-Source Lending: The Cost of Protection against a Powerful Lender," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 256-275.
    3. Cem Demiroglu & Christopher M. James, 2010. "The Information Content of Bank Loan Covenants," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3700-3737, October.
    4. Camerer, Colin & Knez, Marc, 1996. "Coordination, Organizational Boundaries and Fads in Business Practices," Industrial and Corporate Change, Oxford University Press, vol. 5(1), pages 89-112.
    5. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
    6. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January.
    7. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    8. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
    9. Black, Ervin L. & Carnes, Thomas A. & Mosebach, Michael & Moyer, Susan E., 2004. "Regulatory monitoring as a substitute for debt covenants," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 367-391, September.
    10. Yakov Amihud & Kenneth Garbade & Marcel Kahan, 2000. "An Institutional Innovation To Reduce The Agency Costs Of Public Corporate Bonds," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 114-121.
    11. Yaxuan Qi & John Wald, 2008. "State Laws and Debt Covenants," Journal of Law and Economics, University of Chicago Press, vol. 51(1), pages 179-207, 02.
    12. Jyrki Niskanen & Mervi Niskanen, 2004. "Covenants and Small Business Lending: The Finnish Case," Small Business Economics, Springer, vol. 23(2), pages 137-149, 09.
    13. Carletti, Elena, 2004. "The structure of bank relationships, endogenous monitoring, and loan rates," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 58-86, January.
    14. Paul Mather & Graham Peirson, 2006. "Financial covenants in the markets for public and private debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(2), pages 285-307.
    15. Koichi Takeda, 2003. "The Influence of Large Creditors on Creditor Coordination," Economics Bulletin, AccessEcon, vol. 7(6), pages 1-11.
    16. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
    17. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06.
    18. 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.
    19. 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.
    20. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    21. Asquith, Paul & Beatty, Anne & Weber, Joseph, 2005. "Performance pricing in bank debt contracts," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 101-128, December.
    22. Beatty, Anne & Ramesh, K. & Weber, Joseph, 2002. "The importance of accounting changes in debt contracts: the cost of flexibility in covenant calculations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 205-227, June.
    23. Canovi Luciana & Grasso Alessandro Giovanni & Venturelli Valeria, 2007. "Il fabbisogno di capitale di rischio delle PMI innovative in Italia," Banca Impresa Società, Società editrice il Mulino, issue 2, pages 309.
    24. Nash, Robert C. & Netter, Jeffry M. & Poulsen, Annette B., 2003. "Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 201-232, March.
    25. Simon H. Kwan & Willard T. Carleton, 2004. "Financial contracting and the choice between private placement and publicly offered bonds," Working Paper Series 2004-20, Federal Reserve Bank of San Francisco.
    26. Nicolae Garleanu & Jeffrey Zwiebel, 2009. "Design and Renegotiation of Debt Covenants," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 749-781, February.
    27. Sweeney, Amy Patricia, 1994. "Debt-covenant violations and managers' accounting responses," Journal of Accounting and Economics, Elsevier, vol. 17(3), pages 281-308, May.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:ejlwec:v:34:y:2012:i:2:p:327-346. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

    or (Rebekah McClure)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.