Debt Structure Dispersion and Loan Covenants

This paper examines the effect of dispersion in firms' existing debt structures on the use of covenants in new loans. The authors find that more covenants are included when the existing debt is more dispersed. This result is consistent with the idea that dispersed debt structures harbor a great...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Lou, Yun, Otto, Clemens
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2014
Subjects
Default
Online AccessGet full text

Cover

More Information
Summary:This paper examines the effect of dispersion in firms' existing debt structures on the use of covenants in new loans. The authors find that more covenants are included when the existing debt is more dispersed. This result is consistent with the idea that dispersed debt structures harbor a greater potential for conflicts among creditors, so that new lenders demand additional covenants. Consistent with the notion that creditor conflicts matter most in case of default and are aggravated by information asymmetries, they find that the effect of debt structure dispersion is strongest for firms with high default risk and opaque accounting.