Use of Debt Covenants in Small Firms
This paper examines the structure of debt covenants in small firms, with emphasis on privately owned firms. It is based on a survey of a large sample of firms drawn from the S&P Register of Corporations. The findings show that debt covenants imposed on small firms differ according to the firm type (privately owned or publicly owned), debt level, the borrowing cost, and the source of financing (bank or other sources). The evidence is generally consistent with the arguments relating to stockholder-bondholder agency cost conflicts and the Costly Contracting Hypothesis of Smith and Warner (1979).
Volume (Year): 11 (2006)
Issue (Month): 2 (Summer)
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- Iskandar-Datta, Mai E. & Emery, Douglas R., 1994. "An empirical investigation of the role of indenture provisions in determining bond ratings," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 93-111, January.
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- DeAngelo, Harry & DeAngelo, Linda & Wruck, Karen H., 2002. "Asset liquidity, debt covenants, and managerial discretion in financial distress:*1: the collapse of L.A. Gear," Journal of Financial Economics, Elsevier, vol. 64(1), pages 3-34, April.
- Chen, Andrew H. & Hung, Mao-Wei & Mazumdar, Sumon C., 1995. "Loan covenants and corporate debt policy under bank regulations," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1419-1436, November.
- Ilia D. Dichev, 2002. "Large-Sample Evidence on the Debt Covenant Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1091-1123, 09.
- Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
- Cheol Park, 2000. "Monitoring and Structure of Debt Contracts," Journal of Finance, American Finance Association, vol. 55(5), pages 2157-2195, October.
- Neil L. Fargher & Michael S. Wilkins & Lori M. Holder-Webb, 2001. "Initial Technical Violations of Debt Covenants and Changes in Firm Risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(3-4), pages 465-480.
- Kalay, Avner, 1982. "Stockholder-bondholder conflict and dividend constraints," Journal of Financial Economics, Elsevier, vol. 10(2), pages 211-233, July.
- 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.
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