Similarity in the restrictiveness of bond covenants

de Franco, G, Vasvari, F, Vyas, D and Wittenberg-Moerman, R (2020) Similarity in the restrictiveness of bond covenants. European Accounting Review, 29 (4). pp. 665-691. ISSN 0963-8180 OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Accounting
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© 2019 Taylor & Francis. This is an Accepted Manuscript of an article published by Taylor & Francis in European Accounting Review on 15/09/2019 available online:

Funder Name: Social Sciences and Humanities Research Council of Canada
Date Deposited: 12 Nov 2019 09:29
Date of first compliant deposit: 11 Nov 2019
Subjects: Investment appraisal
Last Modified: 30 Apr 2024 00:44

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