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  • 2018
  • Working Paper

Corporate Refinancing, Covenants, and the Agency Cost of Debt

By: Daniel Green
  • Format:Print
  • | Language:English
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Abstract

How valuable are restrictive debt covenants in reducing the agency costs of debt? I exploit the revealed preference decision to refinance fixed-coupon bonds, which weighs observable interest rate savings against the unobservable costs of a change in restrictive covenants. Variation in this trade-off reveals that firms require higher interest rate savings to refinance when it would add restrictive covenants. I structurally estimate a model of debt refinancing and find that a high-yield bond's restrictive covenant package increases the value of speculative-grade firms by 2.4 percent. This suggests that covenants are essential for allowing the tax benefits of debt to offset costs of financial distress.

Keywords

Covenants; Refinancing; Corporate Bonds; Agency Costs; Debt Policy; Borrowing and Debt; Bonds; Interest Rates

Citation

Green, Daniel. "Corporate Refinancing, Covenants, and the Agency Cost of Debt." Working Paper, 2018. (Revise and Resubmit, Journal of Finance.)
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About The Author

Daniel W. Green

Finance
→More Publications

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  • Divesting Harvard's Endowment By: Daniel Green and Luis M. Viceira
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