City Research Online

Abstract

We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design.

Publication Type:	Article
Additional Information:	This is the author accepted manuscript of Gietzmann M, Isidro H, Raonic I. The Rise of Covenant-Lite Bond Contracting. Journal of Accounting, Auditing & Finance. January 2021. doi:10.1177/0148558X20987384
Publisher Keywords:	covenants, debt, risk, turnover, trading volume, control rights
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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