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Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants ABSTRACT We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

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References (34)

Publisher
Wiley
Copyright
© 2007 the American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.2007.01221.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.

Journal

The Journal of FinanceWiley

Published: Apr 1, 2007

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