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Estimating the Benefits of Contractual Completeness

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  • Gregor Matvos

Abstract

I provide a revealed-preference-based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts. I use a rational-expectations-based panel estimator of covenant prices, which does not require quasi-experimental variation, to circumvent the problem of endogenous covenant choices. I find that firms' surpluses exceed the spread paid on a loan. Leverage and interest-rate covenants produce the largest benefits, lending quantitative credence to several standard theories of covenants. Once covenants are chosen, the benefits from fine-tuning them are small, thus rationalizing "boilerplate" covenants. I conclude by discussing the extensions and limitations of my method. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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  • Gregor Matvos, 2013. "Estimating the Benefits of Contractual Completeness," The Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2798-2844.
    • Handle: RePEc:oup:rfinst:v:26:y:2013:i:11:p:2798-2844
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    File URL: http://hdl.handle.net/10.1093/rfs/hht060
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    5. Jason Donaldson & Denis Gromb & Giorgia Piacentino, 2019. "Conflicting Priorities: A Theory of Covenants and Collateral," 2019 Meeting Papers 157, Society for Economic Dynamics.
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    7. Amir Kermani & Yueran Ma, 2020. "Two Tales of Debt," NBER Working Papers 27641, National Bureau of Economic Research, Inc.
    8. Luca Benzoni & Lorenzo Garlappi & Robert Goldstein, 2023. "Incomplete Information, Debt Issuance, and the Term Structure of Credit Spreads," Management Science, INFORMS, vol. 69(7), pages 4331-4352, July.
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