Abstract
We examine the economic determinants and consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s bond covenant dataset, we develop measures that capture similarity in the restrictiveness of bond covenants relative to previously issued peer bonds. We document that the demand for similarity by issuers, their advisors and bond investors follows the predictions of sociological and economic theories. Further, consistent with similarity in covenants reducing bond investors’ information acquisition and processing costs, we show that bonds with more similar covenant restrictiveness receive lower yields at issuance. These bonds are also more likely to be held by long-term bond investors, such as insurance companies, and are characterized by greater liquidity in the secondary market, providing a partial explanation for the lower bond yields. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings information acquisition and processing cost savings that may be larger than the monitoring benefits provided by covenants with more tailored features.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 665-691 |
| Number of pages | 27 |
| Journal | European Accounting Review |
| Volume | 29 |
| Issue number | 4 |
| DOIs | |
| State | Published - Aug 7 2020 |
Funding
This work was supported by Social Sciences and Humanities Research Council of Canada [grant number 498476]. We have benefited from the comments and suggestions of Gerald Lobo (associate editor), two anonymous reviewers, Phil Berger, Doug Diamond, Doug Skinner, Igor Goncharov (discussant), Haiyan Zhou (discussant), and seminar participants at Bocconi University, Boston College, European Accounting Association annual congress 2015, HEC Paris, London Business School, Soochow University (ARA Symposium), Tel-Aviv University, the University of Chicago, the University of Mannheim, the University of Miami, the University of Minnesota, the University of Southern California and the University of Toronto. We gratefully acknowledge the financial support of The Initiative on Global Markets at the University of Chicago Booth School of Business, Rotman School of Management, the University of Toronto, Carlson School of Management, University of Minnesota, the University of Southern California, the AXA Research Fund, and the Social Sciences and Humanities Research Council of Canada. Additional materials are available in an online Supplement at the journal's Taylor and Francis website. We have benefited from the comments and suggestions of Gerald Lobo (associate editor), two anonymous reviewers, Phil Berger, Doug Diamond, Doug Skinner, Igor Goncharov (discussant), Haiyan Zhou (discussant), and seminar participants at Bocconi University, Boston College, European Accounting Association annual congress 2015, HEC Paris, London Business School, Soochow University (ARA Symposium), Tel-Aviv University, the University of Chicago, the University of Mannheim, the University of Miami, the University of Minnesota, the University of Southern California and the University of Toronto. We gratefully acknowledge the financial support of The Initiative on Global Markets at the University of Chicago Booth School of Business, Rotman School of Management, the University of Toronto, Carlson School of Management, University of Minnesota, the University of Southern California, the AXA Research Fund, and the Social Sciences and Humanities Research Council of Canada. Additional materials are available in an online Supplement at the journal's Taylor and Francis website.
Keywords
- Bond Covenants
- Covenant Restrictiveness
- Primary Bond Prices
- Similarity
ASJC Scopus subject areas
- Accounting