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. and Raonic, I. (2020). The Rise of Covenant-Lite Bond Contracting to be published in Journal of Accounting, Auditing and Finance.
Publisher Keywords:	covenants, debt, risk, turnover, trading volume, control rights
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HG Finance
Departments:	Business School > Finance
Date Deposited:	05 Jan 2021 14:23
URI:	https://openaccess.city.ac.uk/id/eprint/25459

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