ABSTRACT
We provide evidence that lenders with lower regulatory capital issue loans with lower financial covenant strictness, consistent with such lenders viewing borrower covenant violations as ...costlier. This is because a borrower covenant violation may lead the lender to downgrade the loan, which triggers accounting that further reduces regulatory capital. Because of regulatory scrutiny, this is true even if the lender waives the violation. We find that this association is concentrated in performance covenants rather than capital covenants. We also find that lenders with relatively low capital issue loans with lower amounts and shorter maturities, consistent with such lenders replacing covenant protection with stricter loan terms on other dimensions. Finally, we find that this form of lender capital management extends to loan syndicate participant lenders, in that participants with relatively low capital adequacy take smaller loan shares when the lead arranger sets high covenant strictness.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: G21; M40; M41.
The first of two volumes, this study explores the two common grace covenants: the Adamic and Noahic. The second volume will examine the special grace covenants: the Abrahamic, Mosaic, Davidic, and ...New covenants. The volumes present covenant as an expression of the nature of God, and show a paradigm of activity by which God works in covenantal relations first to create the world and then, through a redemptive program after the fall, to redeem what was lost.
We examine the impact of covenant violation on corporate operational efficiency. Using an aggregate measure of operational efficiency developed by Demerjian et al. (Management Science, 58, 2012, ...1229–1248), we provide strong empirical evidence that covenant violations hinder firms from achieving operational efficiency. Our finding is robust to alternative definitions of operational efficiency and various model specifications to address potential endogeneity issues. Further analyses show that lower operational efficiency is attributable to covenant‐violating firms' under‐investments in capital and labour. In addition, the negative effect of covenant violation on operational efficiency is not universally the same, and is less evident in violating firms with greater agency problems.
Covenant: A Vital Element of Reformed Theology provides a multi-disciplinary reflection on the theme of the covenant, from historical, biblical-theological and systematic-theological perspectives, ...aiming at the interaction between exegesis and dogmatics.
We examine the role of dynamic covenant threshold values in syndicated loan agreements. We document that 45% of syndicated loans specify dynamic covenant thresholds in earnings-based covenants and ...that these changing thresholds typically become tighter over the life of a loan. We find that covenants with a tight trend provide an important signaling mechanism that meets the needs of borrowers that experience an inferior financial performance at loan initiation but expect future performance improvements. Specifically, we find that these covenants provide underperforming borrowers with a grace period by requiring less restrictive initial thresholds. At the same time, they allow these borrowers to credibly convey information to lenders about their future prospects via gradually more demanding subsequent thresholds. Our empirical evidence also suggests that while lenders entering into tight threshold trend covenant contracts receive weaker covenant protection over the grace period, they benefit from having stronger control rights in subsequent periods.
•Loan contracts commonly specify covenant thresholds in earnings-based covenants that become tighter over time.•These covenants provide a signaling mechanism for underperforming borrowers that expect future performance improvements.•These covenants provide underperforming borrowers with a grace period by requiring less restrictive initial thresholds.•These covenants covey information about borrowers׳ future prospects via gradually more demanding subsequent thresholds.
This article concerns the role of covenant in early rabbinic literature in relation to biblical and especially Second Temple-era predecessors. The first part establishes that the Qumran sectarians ...and earlier circles were drawn to the concept of covenant because it represented, especially through the mechanism of covenant renewal, a powerful tool for defining and supporting group identity. The second part shows that for the rabbis, the importance of covenant lay chiefly, instead, in its capacity to conceptualize the notion of Israel as a collective body defined by corporate responsibility. The third part suggests that this novel deployment of covenant arose in part to counter the individuating force of halakah as law, another innovation of the rabbis.
•This study focuses on covenant violations in China's interbank market.•Research on bond covenants is lacking in China; hence, it fills an important gap.•It finds a drastic decrease in bond issuance ...after covenant violations in China.•This is due to China's distinct institutional environment and bondholder response.
We document a sharp and persistent decline in bond issuances following covenant violations also called technical defaults. However, we find no evidence that firms’ investment and performance change after technical defaults. Furthermore, we document that most of the technical defaults are waived off by bondholders through the debenture holders’ meetings. Although covenants serve as tripwires for renegotiation between bond issuers and investors, control rights are rarely transferred from shareholders to bond investors following technical defaults.
ABSTRACT
In this study, we replicate and extend the Dichev and Skinner DS: 2002 study on the debt covenant hypothesis (DCH). We start by replicating DS and find results consistent with theirs. We ...then extend their work by changing three aspects of the research design: histogram bin width, calculation of slack, and statistical test of discontinuity. We find that the inference from DS is generally robust to varying these choices, although sensitive to different bin widths, during their sample period. We extend our analysis to the period 2000–2019 and find that support for DCH remains robust. We do, however, find a lack of support for DCH when examining the most common financial covenant, debt‐to‐EBITDA. These findings suggest a more nuanced perspective on DCH, whereby different types of financial covenants provide different incentives and abilities to avoid technical default.
Crime and covenants Shazia, Farhan
International review of financial analysis,
07/2024, Volume:
94
Journal Article
Peer reviewed
Open access
Crime is a major concern in the U.S., with implications for the allocation of resources due to the uncertainty associated with it. This paper examines whether the U.S. state property crime rate is a ...source of uncertainty that induces lenders to increase and tighten covenants as a result of increased risk. I found that greater crime exposure by borrowers leads lenders to impose higher and tighter covenants. The results remain robust to various covenant intensity measures and are not driven by endogeneity. A difference-in-difference test shows that a firm's relocation to a higher-crime-prone state significantly increases covenant intensity. I explore two potential channels that drive the effect of property crime: earnings volatility and reduced collateral value of firms operating in crime-ridden states. I find that covenants and spreads are complementary factors in the presence of higher property crimes.
We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite ...loans—borrowing firms’ revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.
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