Download or read book Corporate Governance Covenants Restrictiveness and Performance Pricing in Private Debt Contracts written by Intan Suryani Abu Bakar and published by . This book was released on 2012 with total page 470 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Role and Characteristics of Accounting Based Performance Pricing in Private Debt Contracts written by Ilia D. Dichev and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Performance pricing is a recent contractual innovation, which ties interest rates to a pre-specified grid of some measure of credit risk. We investigate performance pricing because it is becoming a common feature in bank debt, and essentially represents a rare example of market pricing directly tied to accounting-based measures of performance. Our major findings can be summarized as follows. First, we argue that performance pricing emerged as a response to increasing competitive pressures in the market for corporate financing. It reduces transaction and agency costs, and allows for more efficient contracts, furthering the competitive appeal of bank debt. Second, accounting-based performance pricing provisions are detailed, sophisticated, and expansive. The typical pricing grid accommodates ranges of credit risk and interest rate changes, which seem large compared to the economics of private lending. Third, there is a strong pattern of complementarity between same-variable performance pricing and covenant provisions. Probing further, we find that the typical contract sets the initial pricing at the high-cost end of the performance grid, with a same-variable covenant set tightly beyond the top of the grid. Thus, performance pricing and covenants form a well-defined contractual package, where performance pricing provisions are typically designed to handle credit improvements, while credit deteriorations are handled with covenant provisions.

Download or read book Corporate Boards and Performance Pricing in Private Debt Contracts written by Intan Suryani Abu Bakar and published by . This book was released on 2017 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the effects of corporate board characteristics on the use of performance pricing in debt contracts. Performance pricing is a recent innovation that plays a role in addressing some debt contracting problems by linking the ex-ante pricing of debt with ex-post firm performance. Results show that debtholders are more likely to use performance pricing in loan contracts for borrower firms with greater board independence and CEOs with higher share ownership, whereas debtholders are less likely to use performance pricing when firms have smaller boards. Debtholders also are more likely to include an interest increasing performance pricing provision in loan contracts when CEOs' incentives are aligned via higher share ownership, but they are less likely to use them in debt contracts when board ownership is lower. Overall, the results suggest debtholders perceive that characteristics associated with effective boards are beneficial and factor them in their contracting decisions.

Download or read book Financial Covenants and Related Contracting Processes in the Australian Private Debt Market written by Paul R. Mather and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Private debt markets are characterised by covenant restrictive but renegotiation-flexible debt contracts as financial intermediaries lending in private debt markets have a comparative advantage over investors in public debt markets in offering such contracts. The two research questions investigated in this paper are quot;Whether several borrower-and contract-specific variables determine the restrictiveness of financial covenants in private debt contracts?quot; and quot;Whether several borrower-and contract-specific variables are associated with loan officers decisions to waive technical default on financial covenants?quot; Two behavioural experiments involving loan officers examined these contracting processes in the Australian private debt market. The first experiment examined whether certain variables determine the restrictiveness of financial covenants in private debt contracts. Management reputation and security were found to be associated with the number and tightness of financial covenants, whilst high financial risk was associated with increased tightness, but not the number, of such covenants. The effect of the interaction, management reputation x security, was also significant. The second experiment examined the association between certain variables and the likelihood of loan officers waiving technical default on financial covenants. Low financial risk, security and defaults caused solely by a change in accounting standards were found to be associated with the likelihood of the default being waived. These are the first behavioural experiments examining these debt contracting processes reported in the literature and the paper contributes in several ways. First, the methodology allows comparisons with findings of prior research from a new perspective. Second, the methodology enabled the investigation of the effect of management reputation on the restrictiveness of covenants: an important addition to the literature given its prominence in professional banking writings. Third, the experimental setting facilitated controlling the investment opportunity set when studying the responses to technical default thereby overcoming a limitation of the main prior study in this area (Chen and Wei, 1993).

Download or read book A New Governance Structure for Corporate Bonds written by Yakov Amihud and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a new governance structure for publicly registered corporate bonds that combines the benefits of those bonds -- including liquidity and ease of diversification -- with the benefits of private debt contracts, e.g., tight covenants and ease of recontracting. We propose that a company appoint a supertrustee for its public debt whose authority goes far beyond that of a conventional indenture trustee. The supertrustee will actively monitor the company, enforce and, where appropriate, renegotiate a bonds covenants on behalf of public bondholders, thus resolving the collective action problem presently associated with dispersed ownership of public debt. With the supertrustee emulating the functions carried out by, for example, banks in private debt contracts, public bonds will have more and tighter covenants, their holders will be less apprehensive of unchecked actions by issuers, and there will be lower costs to relaxing a covenant when such relaxation is value-increasing. The supertrustee will thus reduce the cost of the conflict of interests between creditors and stockholders and will enable companies to issue bonds at higher prices (or lower yields) that will more than compensate for the costs of the supertrustee.

Download or read book Debt Contracts in the Presence of Performance Manipulation written by Ilan Guttman and published by . This book was released on 2018 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidence suggests that firms often manipulate reported numbers to avoid debtcovenant violations. We study how a firm's ability to manipulate reports affects the terms ofits debt contracts and the resulting investment and manipulation decisions that the firm implements.Our model generates novel empirical predictions regarding the use and the level of debtcovenant, the interest rate, the efficiency of investment decisions, and the likelihood of covenantviolations. For example, the model predicts that the optimal debt contract for firms with relativelystrong (weak) corporate governance (i.e., cost of manipulation) induces overinvestment(underinvestment). Moreover, for firms with strong (weak) corporate governance, an increase incorporate governance quality leads to tighter (looser) covenant, more (less) frequent covenantviolations and lower (higher) interest rate. Our model highlights that the interest rate, which isa common proxy for the cost of debt, neither accounts for the distortion of investment efficiencynor the expected manipulation costs arising under debt financing. We propose a measure of costof debt capital that accounts for these effects.

Download or read book Corporate Governance and Covenants in Debt Contracts written by Li, Xi and published by . This book was released on 2014 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the association between direct debtholder monitoring via bond covenants and delegated monitoring via borrowers' corporate governance mechanisms. We find that bond contracts include fewer covenants when the borrower's corporate governance is more effective in mitigating the agency risk of debt. Bond contracts have fewer covenants when the borrowing firm's board size is larger, board members have more expertise, the firm has more activist shareholders and there are fewer powerful insiders on the board or blockholders. We document that these associations vary cross-sectionally with debtholders' monitoring efficiency. Bondholders rely more on corporate governance monitoring mechanisms when borrowers are informationally opaque and closer to insolvency, two settings associated with higher bondholder monitoring costs. However, when bondholders have the opportunity to delegate monitoring to senior creditors or to insure against credit losses in the CDS market, they rely less on corporate governance mechanisms. Finally, we document that, consistent with banks being more efficient monitors than bondholders, bank syndicates rely less on corporate governance monitoring unless they have a dispersed ownership.

Download or read book Family Firms Debtholder Shareholder Agency Costs and the Use of Covenants in Private Debt written by Mark Bagnoli and published by . This book was released on 2008 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We ask whether the private debt contracts of family firms contain more restrictive covenants tied to accounting numbers than those of non-family firms. Our examination of Dealscan data indicates that Samp;P 500 family firms are more likely to include accounting-based covenants that limit the lender(s)' risk that managers will divert cash or assets to shareholders than are Samp;P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. This consistent with family firms producing higher quality financial reports (Ali et al. 2007) and with accounting numbers playing an important role in mitigating the possibly severe debtholder-shareholder agency costs when a family firm employs a two-tiered stock structure.

Download or read book Performance Pricing and Covenants in Debt Contracts in the UK written by and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Renegotiation and the Choice of Covenants in Debt Contracts written by Daniel Andres Saavedra Lux and published by . This book was released on 2015 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: I investigate whether and how expected future contract renegotiation considerations affect the type of covenants used in ex-ante debt contracts. I find that when future contract renegotiation costs are expected to be high, debt contracts are less likely to include covenants that restrict the borrower's financial flexibility in good states. This finding suggests that when renegotiation costs are high, borrowers and lenders avoid the use of covenants that are more likely to hold up the borrower and force it to bypass value-enhancing corporate policies (e.g., investments). Consistent with this interpretation, the negative relationship between renegotiation costs and the presence of flexibility-reducing covenants becomes stronger when the borrower has fewer outside options and financial flexibility becomes more valuable. Finally, I find that when future renegotiation costs are expected to be high, debt contracts have more covenants that are directly linked to the current performance of the borrower, which allows for a more efficient allocation of decision rights between the borrower and lenders. Overall, this study provides initial evidence about how renegotiation considerations affect the design of covenant packages in debt contracts.

Download or read book Measuring the Probability of Financial Covenant Violation in Private Debt Contracts written by Peter R. Demerjian and published by . This book was released on 2015 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure the probability that a borrower will violate financial covenants in private debt contracts. We analyze hand-coded data and specify standard covenant definitions using Compustat data that minimize measurement error for all individual Dealscan covenants. We use these definitions to create a measure of aggregate probability of violation, which can be used across all covenants in a loan or among covenant subsets of interest. We provide evidence that our aggregate probability measure is superior to alternatives used in prior literature.

Download or read book The Structure and Pricing of Corporate Debt Covenants written by Michael Bradley and published by . This book was released on 2011 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence on the covenant structure of corporate loan agreements. Building on the work of Jensen and Meckling (1976), Myers (1977) and Smith and Warner (1979), 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.

Download or read book Takeover Exposure Agency and the Choice between Private and Public Debt written by Matteo P. Arena and published by . This book was released on 2013 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines how governance characteristics are related to the corporate choice between public debt and different forms of private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to issue private debt. We also document that the cost of public debt is more sensitive to the degree of takeover exposure than the cost of bank debt. These results are consistent with the hypothesis that banks mitigate the expected negative impact of takeovers on debtholder value by enforcing restrictive covenants and by renegotiating the debt contract in case of a change in control of the borrowing firm. The results of this study are also consistent with the conjecture that firms more exposed to takeovers are more likely to issue speculative-grade debt in the 144A market than to rely on public debt. Moreover, we show that firms characterized by weaker internal monitoring are less likely to borrow from banks, consistent with the view that managers of firms with greater agency problems avoid bank monitoring to maintain perquisite consumption.

Download or read book The Use of Financial Covenants in Australian Private Debt Contracts written by Paul Rohan Mather and published by . This book was released on 1997 with total page 718 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Syndicate Size and the Choice of Covenants in Debt Contracts written by Daniel Saavedra and published by . This book was released on 2017 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: I investigate whether and how syndicate size influences the type of covenants used in debt contracts. Prior theory and evidence suggest that renegotiation considerations from coordination difficulties in large syndicates and intertemporal transfers due to relationship lending in small syndicates are factors in the design of covenants. I find that for large syndicates, borrowers and lenders avoid the use of flexibility-reducing covenants that are more likely to impact negatively on value-enhancing corporate policies (e.g., investments) in good states of the world. This effect becomes stronger when the borrower has fewer outside financing options. Additionally, I find that contracts with large syndicates are more likely to have more covenant slack, include performance pricing provisions, have tailored capital expenditure covenants that alleviate over- and under-investment problems, and principally rely on covenants that are directly linked to the current performance of the borrower. Collectively, these results imply that syndicate size and related renegotiation considerations affect how accounting information is used in debt contracts.

Download or read book CREDITOR CONTROL AND CORPORATE GOVERNANCE written by Yuqi Gu and published by . This book was released on 2013 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt: Agency theory suggests that conflicts of interest between managers and the suppliers of finance (shareholders and debt-holders) can cause considerable costs on the firm. This study investigates the role of financial contracts and corporate governance in mitigating agency conflicts. Chapter 1 examines the effect of creditor control on CEO compensation. We present evidence that creditor control has significant impact on CEO compensation. CEOs experience a sharp cut of 17% of excessive pay following financial covenant violations. Differences-in-differences test shows that the reduction in abnormal CEO compensations is only associated with violation firms, not with their matched non-violation peers during the same time period. Furthermore, we find that the cut in excessive pay upon violations is greater in firms facing stronger creditor control, i.e., firms borrowed from banks with which they have a stronger prior lending relationship or high reputation banks. Despite the fact that the prior literature has documented greater CEO compensations in firms with weaker shareholder governance, we find that shareholder governance has little significant impact on the reduction of abnormal CEO compensations following debt covenant violations. In addition, we find that managerial pay-risk sensitivity (vega) is significantly reduced after covenant violation, particularly in the presence of greater creditor control power. In contrast, covenant violations are not associated with any significant change in managerial pay-performance sensitivity (delta). Chapter 2 investigates the impact of creditor control on corporate innovation via the lens of corporate events - debt covenant violation, where control right is shifted from equity-holders to creditors. By employing differences-in-differences tests, we document that firms experience a significant cut in corporate innovation following financial covenant breaches, especially in innovation intensive industries. Furthermore, we show that creditor control plays a direct role in curbing corporate innovative activities upon covenant violations. We find that in the presence of stronger bank control, violation firms experience a significantly larger reduction in both the quantity (as measured by number of patents) and quality (as measured by non-self citations received) of innovations. Interestingly, we find that banks' expertise in certain innovative industry can moderate the adverse effect of creditor control on innovations in those industries. These results are consistent with the argument that banks are less tolerant of failures and debt covenants restrict manager flexibilities. Our findings also suggest that banks' experience, knowledge, and expertise in certain innovative industries allow them to have a better assessment about borrowers' innovative projects, and thereby mitigating the agency conflict. Chapter 3 examines the association between managerial time horizon and corporate hedging. We document that CEO's managerial time horizon has a significant effect on firms corporate hedging policy. CEOs are more likely to use derivatives and use significantly more derivatives when they approach retirement, i.e., when they have a short horizon. Propensity score matching method suggests that this finding is not driven by sample selection problem. We find that increases in derivative hedging are results of CEOs' pension entitlement. Considering future pension payments, CEOs have greater incentive to limit firm risk so as to reduce the probability of bankruptcy as they approach retirement. Furthermore, we find that increase in hedging activities is restricted in firms with strong corporate governance (e.g., weak anti-takeover provision, non-dual CEO and high institutional investor holding), suggesting that increased hedging does not benefit shareholders.

Download or read book Capital Versus Performance Covenants in Debt Contracts written by Hans Bonde Christensen and published by . This book was released on 2014 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: Building on contracting theory, we argue that financial covenants control the conflicts of interest between lenders and borrowers via two different mechanisms. Capital covenants control agency problems by aligning debtholder-shareholder interests. Performance covenants serve as tripwires that limit agency problems via the transfer of control to lenders in states where the value of their claim is at risk. Companies trade off these mechanisms. Capital covenants impose costly restrictions on capital structure, while performance covenants require contractible accounting information to be available. Consistent with these arguments, we find that the use of performance covenants relative to capital covenants is positively associated with (1) the financial constraints of the borrower, (2) the extent to which accounting information portrays credit risk, (3) the likelihood of contract renegotiation, and (4) the presence of contractual restrictions on managerial actions. Our findings suggest that accounting-based covenants can improve contracting efficiency in two conceptually different ways.