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Debt Structure Dispersion and Loan Covenants

Author

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  • Lou , Yun
  • Otto , Clemens

Abstract

This paper examines the effect of dispersion in firms' existing debt structures on the use of covenants in new loans. The authors find that more covenants are included when the existing debt is more dispersed. This result is consistent with the idea that dispersed debt structures harbor a greater potential for conflicts among creditors, so that new lenders demand additional covenants. Consistent with the notion that creditor conflicts matter most in case of default and are aggravated by information asymmetries, they find that the effect of debt structure dispersion is strongest for firms with high default risk and opaque accounting.

Suggested Citation

  • Lou , Yun & Otto , Clemens, 2014. "Debt Structure Dispersion and Loan Covenants," HEC Research Papers Series 1033, HEC Paris.
    • Handle: RePEc:ebg:heccah:1033
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    More about this item

    Keywords

    Debt Dispersion; Loan Covenants; Debt Contract Terms; Debt Structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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