Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants

Nash, Robert C.; Netter, Jeffry M.; Poulsen, Annette B.

doi:10.1016/s0929-1199(02)00007-x

Cited by 224 publications

(171 citation statements)

References 40 publications

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“…They indicate how reputation of banks impacts corporate access to debt finance (extending Nash et al, 2003), how the private debt market differs from the public (bond) market (our results are different from Fang, 2005), and which companies are more likely to attract reputable arrangers for their loan. Related studies have shown that this may further affect how corporations can raise capital in the equity market (e.g., Cook et al, 2003;An and Chan, 2008).…”

Section: Introductionmentioning

confidence: 68%

“…A few other papers deal with the monitoring role of covenants in the public debt market, showing that compared to the loan market bond issuers face fewer restrictions (Gilson and Warner, 1998). Moreover, Nash et al (2003) find evidence that high growth firms include fewer dividend covenants in their debt contracts, reflecting a preference for flexibility in financing rather than contracting practice. Chava et al (2010) show some variation in spread and covenants, finding no significant movement in the direction of bondholder protection, but in the cases of merger protection and poison puts.…”

Section: Related Literaturementioning

confidence: 98%

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Bank reputation in the private debt market

McCahery

Schwienbacher

2010

Journal of Corporate Finance

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We examine the impact of lead arrangers' reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.

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Section: Introductionmentioning

confidence: 68%

Section: Related Literaturementioning

confidence: 98%

Bank reputation in the private debt market

McCahery

Schwienbacher

2010

Journal of Corporate Finance

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“…As argued by Almeida and Campello (2007), the information about investment opportunities is captured by other variables such as cash flows if the firm is seen as financially constrained, and in this sense Tobin's Q is a comparatively poorer proxy for investment opportunities 9 . To address this concern, we use the growth rate of sales level as an alternative proxy for investment opportunities following Nash et al (2003), and re-estimate our bank loan equations. Additionally, we also repeat the bank loan equation estimation using the bank loan level data for robustness check.…”

Section: Other Robustness Testsmentioning

confidence: 99%

To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China

Liu

Pan

Tian

2018

Journal of Banking & Finance

119

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Using a panel of Chinese firms over the period 2003-2013, we show that, from the supply-side perspective, as a result of the implementation of the economic stimulus package in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability, and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs. in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs.

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“…Also, new bond covenant index decreases with firm size but increases with firm leverage, which is consistent with Maliz (1986) who attributes the relation to higher ex-ante agency costs. We also show that firms with high market-to-book ratio use fewer covenants in new issues, which could be explained by Kahan and Yermack (1998) and Nash, Netter, and Poulsen (2003). They find that high-growth firms are less likely to have restrictive bond covenants since potential benefits of covenants are overwhelmed by costs.…”

Section: Empirical Analysesmentioning

confidence: 66%

Do Covenants of Bonds Outstanding Affect the Choice of Covenants of New Issues? Evidence from the U.S. Corporate Bonds

Wang

Chiu

Wrolstad

2018

AFR

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This paper investigates the relation between debt covenants of a firm's bonds outstanding and covenants of its newly issued bonds. On the one hand, since covenants are priced and costly, newly issued bonds may not include covenants that have been used in bonds outstanding, suggesting a negative relation between covenants of bonds outstanding and those of new issues. On the other hand, since firms tend to use boilerplate language in debt indentures, similar covenants of bonds outstanding are likely to be used repeatedly in the contracts of new issues, indicating a positive relation. Based on the U.S. public corporate bonds data from 1990 to 2014, this paper provides empirical evidence that covenants of a firm's new issues are positively related to covenants of its bonds outstanding, suggesting boilerplate language is widely used in corporate bond contracts. Results also show that use of boilerplate language is significantly related to issuers' financial condition and economic cycle. Issuers with stable financial condition, as measured by commercial paper ratings, tend to use boilerplate language more frequently. And during the Dot-Com bubble period, boilerplate language is used more prevalently than during the financial crisis period.

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Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants

Cited by 224 publications

References 40 publications

Bank reputation in the private debt market

Bank reputation in the private debt market

To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China

Do Covenants of Bonds Outstanding Affect the Choice of Covenants of New Issues? Evidence from the U.S. Corporate Bonds

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