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How Laws Affect Contracts: Evidence from Yankee Bond Covenants


  • John Wald

    (The University of Texas at San Antonio)

  • Yaxuan Qi

    (Concordia University)

  • Lukas Roth

    (Pennsylvania State University)


We examine how country-level legal and institutional differences in creditor and shareholder rights shape the use of bond covenants. Using comprehensive debt covenant information for a sample of Yankee bonds issued by firms from more than 50 countries, we find that bond contracts for firms incorporated in countries with stronger creditor rights use fewer restrictive covenants. This finding suggests that creditor rights laws substitute for debt covenants in reducing the agency cost of debt. On the other hand, bond contracts for firms incorporated in legal regimes with stronger shareholder rights include more covenants, suggesting that greater shareholder rights may actually increase the shareholder-bondholder agency conflict. These results are robust to alternative measures of creditor rights and shareholder rights. We also document that stronger firm-level corporate governance is positively related to the use of restrictive covenants even after controlling for country institutions.

Suggested Citation

  • John Wald & Yaxuan Qi & Lukas Roth, "undated". "How Laws Affect Contracts: Evidence from Yankee Bond Covenants," Working Papers 0065, College of Business, University of Texas at San Antonio.
  • Handle: RePEc:tsa:wpaper:0065

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    References listed on IDEAS

    1. Jackie Coyle-Shapiro, 2000. "Consequences Of The Psychological Contract For The Employment Relationship: A Large Scale Survey," Journal of Management Studies, Wiley Blackwell, vol. 37(7), pages 903-930, November.
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    More about this item


    Covenants; contracts; creditor rights; shareholder rights; corporate governance;

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law


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