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Role, Structure, and Determinants of Debt Covenants: Evidence from Japan

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  • KOCHIYAMA, Takuma
  • NAKAMURA, Ryosuke

Abstract

We examine types of financial covenants and how they are used in Japanese loan markets. Since previous literature on covenants focused on US firms, little is known about financial covenants in the so-called bank-oriented countries. We use a hand-collected dataset to explore the (1) types of financial covenants and (2) determinants of the use and strictness of financial covenants. Our binominal regression analysis shows that financial factors such as profitability, leverage, and interest rates affect the use of financial covenants. Most interestingly, we find that factors specific to Japan, dependence on the main bank and foreign shareholder ownership, also affect the use of financial covenants. Furthermore, we present that the borrower’s leverage is a key determinant for the strictness of financial covenants.

Suggested Citation

  • KOCHIYAMA, Takuma & NAKAMURA, Ryosuke, 2014. "Role, Structure, and Determinants of Debt Covenants: Evidence from Japan," Working Paper Series 187, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    • Handle: RePEc:hit:hjbswp:187
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    Cited by:

    1. Suzuki, Tomohiro & Kochiyama, Takuma & 河内山, 拓磨, 2017. "Impact Of Fair Value Measurement On Corporate Investment: Other Comprehensive Income," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 51(1), pages 17-37, October.
    2. Kim Nguyen, 2022. "The Real Effects of Debt Covenants: Evidence from Australia," RBA Research Discussion Papers rdp2022-05, Reserve Bank of Australia.
    3. Kusano, Masaki & Sakuma, Yoshihiro & Tsunogaya, Noriyuki, 2016. "Economic consequences of changes in the lease accounting standard: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 73-88.
    4. KOCHIYAMA, Takuma & 河内山, 拓磨 & SEKI, Koreyoshi, 2017. "Discretion in the Deferred Tax Valuation Allowance and Its Impact on Firms' Dividend Payouts," Working Paper Series 209, Management Innovation Research Center, School of Business Administration, Hitotsubashi University Business School.

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