We examine the economic consequences associated with the inclusion of covenants with similar terms in bond contracts. Using a unique Moody’s dataset that allows us to capture the restrictiveness of covenant terms, we develop covenant similarity measures by comparing a new bond’s covenants with the covenants of bonds previously issued by peer companies or by the same firm. We document that bonds with more similar covenants receive significantly lower bond yields at issuance. These bonds are also characterized by greater liquidity in the secondary market and are more likely to be held by long-term investors such as insurance companies. These results are consistent with the interpretation that modifications of covenant terms when bonds are issued potentially generate contracting and information costs that offset the credit protection benefits provided by a set of tailored covenants.
| Speaker: | Dr Gus DeFranco Associate Professor, University of Toronto |
| When: |
3.30 - 5.00pm |
| Venue: | School of Accountancy Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |