IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v23y2010i10p3700-3737.html
   My bibliography  Save this article

The Information Content of Bank Loan Covenants

Author

Listed:
  • Cem Demiroglu
  • Christopher M. James

Abstract

This article examines the determinants of financial covenant thresholds in bank loan agreements and information conveyed through the selection of tight financial covenants. We find that riskier firms and firms with fewer investment opportunities select tighter financial covenants. We also find that selection of tight covenants is associated with improvements in the covenant variable and declines in investment spending and net debt issuance. We observe these changes also for borrowers that do not breach their covenants, suggesting that they are not simply the result of creditor influence conditional on a technical default. Furthermore, we find that violations of tightly set covenants have significantly less of an impact on the borrower's investment spending and net debt issuance than violations of loosely set covenants. Overall, our results suggest that the selection of tight covenants conveys information concerning future changes in covenant variables, investment and financial policies, and the outcome of covenant violations. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:rfinst:v:23:y:2010:i:10:p:3700-3737
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhq054
    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 below or search for a different version of it.

    Other versions of this item:

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:23:y:2010:i:10:p:3700-3737. 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: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.