Investment Opportunities and the Design of Debt Securities

Kahan, Marcel; Yermack, David

doi:10.1093/oxfordjournals.jleo.a023394

Cited by 87 publications

(50 citation statements)

References 17 publications

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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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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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“…Jensen & Meckling (1976) suggest that more growth opportunities may increase the overinvestment problems since high growth …rms are more likely to have risky investments left in their investment opportunity set. In addition, Kahen & Yermack (1998) and Nash et al (2003) …nd that high growth …rms tend to include less restrictive covenants and argue that high growth …rms value their investment opportunities and investment decision ‡exibilities more (see also, e.g., Bradley & Roberts (2004), and Goyal (2005)). We use Market-to-book ratio as a measure of investment opportunities and predict a positive relation between risk taking and Market-to-book ratio.…”

Section: Control Variablesmentioning

confidence: 99%

“…1 3 See, e.g., Kahen & Yermack (1998), Nash, Netter & Poulsen (2003, Goyal (2005)). A further interesting …nding by Kahen & Yermack (1998) is that convertibility seems to subsitute for covenants when …rms face high growth opportunities.…”

mentioning

confidence: 99%

“…A further interesting …nding by Kahen & Yermack (1998) is that convertibility seems to subsitute for covenants when …rms face high growth opportunities. debt contracts.…”

mentioning

confidence: 99%

“…2 7 Smith & Warner (1979) suggest, and Kahen & Yermack (1998) empirically con…rm, that the convertibility feature might substitute for covenant protection, especially when the issuer has good growth opportunities.…”

mentioning

confidence: 99%

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Risk Shifting, Debt Governance and Managerial Incentives

Hjortshoj¹,

Wei

2007

SSRN Journal

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This paper studies the impact of debt governance on …rms' risk shifting behavior. We construct …rm-level debt governance indices using corporate bond indenture provisions, and a market-based risk shifting measure estimated using a contingent-claim framework. We …rst document that …rms with strong debt governance subsequently lower business risk relative to their industry peers, and this relationship mainly exists among …rms with high default probability. Further evidence suggests that debt governance plays an important role in mitigating the impact of managerial risk-taking incentives on risk shifting. Higher sensitivity of CEO wealth to stock volatility (Vega) is signi…cantly positively related to risk shifting, but this e¤ect is signi…cantly weakened when strong debt governance is in place. Also, bondholders appear to bene…t from the impact of debt governance on risk shifting. Higher Vega is associated with higher credit spreads for bonds under weak debt governance. Under strong debt governance, higher Vega is associated with signi…cantly lower credit spreads. JEL classi…cation: G13, G30, G32, J33Keywords: Risk shifting, default risk, debt governance, managerial incentiveThe authors are grateful for helpful comments from Kose John and Peter Tind Larsen. We would also like to thank seminar participants at University of Aarhus. Any remaining errors are the authors'responsibility.

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Do foreign lenders' national cultures affect loan pricing?

Pappas

2021

Int. J Fin Econ

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We examine the role of foreign lenders' national cultures in the pricing of syndicated loans. Using Schwartz's cultural dimensions, embeddedness, and mastery, we find that foreign lenders domiciled in countries with higher embeddedness and mastery scores offer lower interest rates. These findings are robust to a battery of robustness tests and incremental to the effects of formal institutions. We also document that greater information asymmetry and foreign lenders' bargaining powers strengthen the impact of the foreign lenders' cultural values on loan pricing. An additional analysis shows that the intensity of loan covenants is also negatively related to the embeddedness and mastery scores of the foreign lenders' countries of domicile. Our findings suggest that cross-border debt contracting decisions are not only determined by objective judgments about risk and return but also depend on the subjective assertion of values and beliefs guided by informal institutions, such as cultural norms. Cultural values can nurture and shape economic incentives and perceptions of sophisticated professional bankers in increasingly globalized market settings, even when the financial stakes are substantial.

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Investment Opportunities and the Design of Debt Securities

Cited by 87 publications

References 17 publications

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

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

Risk Shifting, Debt Governance and Managerial Incentives

Do foreign lenders' national cultures affect loan pricing?

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