The Structure and Pricing of Corporate Debt Covenants

2015 ◽  
Vol 05 (02) ◽  
pp. 1550001 ◽  
Author(s):  
Michael Bradley ◽  
Michael R. Roberts
Keyword(s):  
Financial Economics ◽  
Theory Of The Firm ◽  
High Growth ◽  
Cash Flows ◽  
Corporate Debt ◽  
Managerial Behavior ◽  
Growth Opportunities ◽  
Macroeconomic Factors ◽  
Corporate Borrowing ◽  
Corporate Loan

We provide evidence on the covenant structure of corporate loan agreements. Building on the work of Jensen and Meckling [1976, Theory of the Firm: Managerial Behavior, Agency Costs, and Captial Structure, Journal of the Financial Economics 3, 305–360], Myers [1977, Determinants of Corporate Borrowing, Journal of Financial Economics 5, 145–147] and Smith and Warner [1979, On Financial Contracting: An Analysis of Bond Covenants, Journal of Financial Economics 7(2), 117–161]. We summarize and test the implications for what we refer to as the Agency Theory of Covenants (ATC), using a large sample of privately placed corporate debt. Our results are consistent with many of the implications of the ATC, including a negative relation between the promised yield on corporate debt and the presence of covenants. We also find that borrower and lender characteristics, as well as macroeconomic factors, determine covenant structure. Loans are more likely to include protective covenants when the borrower is small, has high growth opportunities or is highly levered. Loans made by investment banks and syndicated loans are also more likely to include protective covenants, as are loans made during recessionary periods or when credit spreads are large. Finally, we show that consistent with the ATC, firms that elect to issue private rather than public debt are smaller, have greater growth opportunities, less long-term debt, fewer tangible assets, more volatile cash flows and include more covenants in their debt agreements. An important byproduct of our analysis is to demonstrate empirically that covenant structure and the yield on corporate debt are determined simultaneously.

scholarly journals Determinants of dividend policy in GCC firms: an application of partial least square method

2016 ◽  
Vol 13 (3) ◽  
pp. 455-466 ◽  
Author(s):  
B Rajesh Kumar ◽  
K S Sujit
Keyword(s):  
High Growth ◽  
Least Square Method ◽  
Cash Flows ◽  
Payout Policy ◽  
Partial Least Square ◽  
Least Square ◽  
Growth Opportunities ◽  
Dividend Payout ◽  
Partial Least Square Method ◽  
Future Growth

This study focuses on providing empirical evidence on explanation of alternate dividend theories and determinants of payout policies by examining the GCC market. The study explores the financial determinants of the dividend payout policies by examining 646 dividend intensive firms of the GCC. The results suggest that large firms in GCC tends to have larger retained cash flows and tend to have higher dividend intensity. It can be implied that GCC based firms adopt a balanced and cautious approach regarding future growth opportunities as well as the dividend payout policy. Higher the liquidity and profitability signals higher dividend intensity. GCC firms which are liquid and profitable tend to pay more dividends. GCC firms with higher market valuation tend to pay more dividends. Firms with high growth rates of earnings and assets tend to pay less dividends. Firms with high leverage are riskier and risky firms tend to pay less dividends.

Cash holdings and corporate governance: theory and contrary evidence from hotel firms

2018 ◽  
Vol 30 (10) ◽  
pp. 3117-3134 ◽  
Author(s):  
Tarik Dogru ◽  
Ercan Sirakaya-Turk
Keyword(s):  
Corporate Governance ◽  
Cash Holdings ◽  
Agency Problems ◽  
High Growth ◽  
Cash Flows ◽  
Governance Mechanisms ◽  
Growth Opportunities ◽  
Content Type ◽  
Corporate Governance Mechanisms

Purpose The purpose of this study is to examine the extent to which the quality of corporate governance mechanisms and growth opportunities affect agency problems in hotel firms. Design/methodology/approach The effects of cash flows on investments and cash holdings were analyzed using three-stage least square analysis to determine the extent to which agency problems are due to the quality of corporate governance in hotel firms. Findings The findings showed that the effects of cash flows on investments and cash holdings were greater in well-governed hotel firms than in poorly governed hotel firms. These effects were also greater in low-growth hotel firms than in high-growth hotel firms. However, the results from a concurrent examination of the quality of corporate governance and growth opportunities showed that poorly governed hotel firms with low-growth opportunities are exposed to agency problems. Research limitations/implications These results suggest that neither corporate governance mechanisms nor growth opportunities alone indicate agency problems. Theoretical implications are discussed within the realms of free cash flow theory and growth hypothesis. Practical implications High-growth hotel firms should retain all of their cash and cash flows to undertake value-increasing projects when they become available. Shareholders’ wealth is more likely to be maximized in high-growth firms regardless of the quality of corporate governance. Originality/value Although various aspects of corporate governance have been investigated in hospitality literature, previous studies did not examine the concurrent effects of corporate governance and growth opportunities on agency problems.

scholarly journals Debt Maturity and the Dynamics of Leverage

2021 ◽  
Author(s):  
Thomas Dangl ◽  
Josef Zechner
Keyword(s):  
Transaction Costs ◽  
Financial Distress ◽  
Cash Flows ◽  
Debt Maturity ◽  
Corporate Debt ◽  
Short Term ◽  
Trade Off ◽  
Maturity Structure

Abstract This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transaction costs since larger amounts of expiring debt need to be refinanced. We show that this trade-off between higher expected transaction costs against the commitment to reduce leverage in low-profitability states motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Evidence supports the model’s predictions.

Technological Change and the Theory of the Firm: The American Locomotive Industry, 1920–1955

1976 ◽  
Vol 50 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Thomas G. Marx
Keyword(s):  
Technological Change ◽  
Theory Of The Firm ◽  
Managerial Behavior ◽  
Dominant Firms

This study analyzes the differing managerial behavior of the three dominant firms in the steam locomotive oligopoly as diesel locomotives replaced steam.

DESIGN AND VALUATION OF CORPORATE SECURITIES WITH STRATEGIC DEBT SERVICE AND ASYMMETRIC INFORMATION

1999 ◽  
Vol 02 (02) ◽  
pp. 201-219 ◽  
Author(s):  
YONGHUA PAN
Keyword(s):  
Asymmetric Information ◽  
Information Asymmetry ◽  
Risk Premium ◽  
High Growth ◽  
Cash Flows ◽  
Debt Service ◽  
Growth Potential ◽  
Unified Framework ◽  
Financing Decisions ◽  
Corporate Securities

This paper studies the effects of strategic debt service, asymmetric information and their interaction on the valuation of corporate securities and on corporate financing decisions. By introducing information asymmetry into a continuous-time setting, our model is able to integrate these two factors in a unified framework. Such a model allows for obtaining valuation results in a separating equilibrium. The basic results of this paper imply that the risk premium of debt could be partly contributed by information effect. This part of risk premium could be very significant for those good firms with a project which will produce much higher cash flows than what the market expects. We also find that a firm's financing decision depends on its primitives: firms are more apt to rely on equity if they have: (1) high growth potential, (2) riskier projects, (3) higher ratio of intangible assets to total assets and (4) lesser information asymmetry; firms would prefer debt, otherwise.

Anatomy of Corporate Borrowing Constraints*

2020 ◽  
Vol 136 (1) ◽  
pp. 229-291 ◽  
Author(s):  
Chen Lian ◽  
Yueran Ma
Keyword(s):  
Asset Price ◽  
Cash Flows ◽  
Borrowing Constraints ◽  
Collateral Damage ◽  
Total Debt ◽  
Borrowing Constraint ◽  
Corporate Borrowing ◽  
Physical Assets ◽  
Macro Finance ◽  
Nonfinancial Firms

Abstract Macro-finance analyses commonly link firms’ borrowing constraints to the liquidation value of physical assets. For U.S. nonfinancial firms, we show that 20% of debt by value is based on such assets (asset-based lending in creditor parlance), whereas 80% is based predominantly on cash flows from firms’ operations (cash flow–based lending). A standard borrowing constraint restricts total debt as a function of cash flows measured using operating earnings (earnings-based borrowing constraints). These features shape firm outcomes on the margin: first, cash flows in the form of operating earnings can directly relax borrowing constraints; second, firms are less vulnerable to collateral damage from asset price declines, and fire sale amplification may be mitigated. Taken together, our findings point to new venues for modeling firms’ borrowing constraints in macro-finance studies.

CEO Domination, Growth Opportunities, and their Impact on Audit Fees

2001 ◽  
Vol 16 (3) ◽  
pp. 189-208 ◽  
Author(s):  
Judy S. L. Tsui ◽  
Bikki Jaggi ◽  
Ferdinand A. Gul
Keyword(s):  
High Growth ◽  
Chief Executive ◽  
Audit Fees ◽  
Negative Association ◽  
Corporate Boards ◽  
Growth Opportunities ◽  
Audit Fee ◽  
Monitoring Mechanism ◽  
Growth Firms ◽  
The Relationship

This study examines the relationship between a firm's internal monitoring mechanism and its impact on the audit fee. The first hypothesis investigates whether firms with independent corporate boards (chief executive officer and chairman being separate individuals) provide a more effective internal monitoring mechanism and are thus associated with lower control risk, resulting in lower audit effort and fees as compared to nonindependent, CEO-dominated boards. The second hypothesis examines whether the effectiveness of the internal monitoring mechanism provided by independent corporate boards is independent of the firms' growth opportunities. High-growth firms are by nature more difficult to monitor due to the existence of discretionary investments and measurement problems associated with future assets. Thus, the negative association between independent corporate boards and audit fees is expected to be affected by a firm's growth. Results using 650 observations from Hong Kong companies provide support for both hypotheses.

scholarly journals Leverage and investment opportunities: the effect on high growth firms

2020 ◽  
Vol 31 (83) ◽  
pp. 302-317
Author(s):  
Rossimar Laura Oliveira ◽  
Eduardo Kazuo Kayo
Keyword(s):  
Capital Structure ◽  
Inverse Relationship ◽  
Negative Relationship ◽  
High Growth ◽  
Growth Opportunities ◽  
Dynamic Panel ◽  
Industry Growth ◽  
Investment Opportunities ◽  
Growth Firms ◽  
The Relationship

ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Although the relationship between growth opportunities (e.g., Tobin’s Q) and capital structure has already been widely discussed from a conceptual viewpoint, there are still important empirical gaps, particularly due to the endogeneity of the first variable. This paper seeks to minimize these problems by operationalizing the concept of idiosyncratic technological shocks. This issue is relevant because the negative relationship between growth and leverage may indicate that for the most efficient companies there will be a reduction in bankruptcy cost and a reduction in agency costs for the least efficient companies. This paper contributes to the development of studies in the area by demonstrating the inverse relationship between growth and leverage, with the model and the variable that represents the positive shocks experienced by companies. The dynamic panel method enables an analysis of the variation in debt in relation to the variation in value using the first differences and controlling the lagged debt effect. To apply the model, we used data from Brazilian companies, covering 1995 to 2016. The main results show that the greater the ratio between the firm’s growth opportunities and its industry growth opportunities, the lower its leverage indicators. The complementary results suggest that less leveraged firms have this negative relationship to an even stronger degree.

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