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Debt Covenants and Corporate Governance

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  • Sudheer Chava
  • Shunlan Fang
  • Praveen Kumar
  • Saumya Prabhat

Abstract

We review the recent theoretical and empirical literature on debt covenants with a particular focus on how creditor governance after covenant violations can influence the borrower's corporate policies. From the theoretical literature, we identify the key trade-offs that help explain the observed heterogeneity in covenant types, inclusion, likelihood of violation, and postviolation renegotiation flexibility. Empirically, we first review the literature that deals with ex ante evidence on covenant design and the various factors that influence covenant design; we next review the ex post evidence on the impact of technical covenant violations on the borrower. We then discuss limitations of the existing theoretical and empirical studies and conclude with some directions for future research in this burgeoning area.

Suggested Citation

  • Sudheer Chava & Shunlan Fang & Praveen Kumar & Saumya Prabhat, 2019. "Debt Covenants and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 11(1), pages 197-219, December.
    • Handle: RePEc:anr:refeco:v:11:y:2019:p:197-219
    DOI: 10.1146/annurev-financial-110716-032511
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    Cited by:

    1. Archana Saxena & Rajesh Singh & Anita Gehlot & Shaik Vaseem Akram & Bhekisipho Twala & Aman Singh & Elisabeth Caro Montero & Neeraj Priyadarshi, 2022. "Technologies Empowered Environmental, Social, and Governance (ESG): An Industry 4.0 Landscape," Sustainability, MDPI, vol. 15(1), pages 1-17, December.
    2. Choy, Stacey & Jiang, Shushu & Liao, Scott & Wang, Emma, 2024. "Public environmental enforcement and private lender monitoring: Evidence from environmental covenants," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    3. Akdoğu, Evrim & Alp Paukowits, Aysun, 2022. "Supply of credit and corporate bond covenants," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Redouane Elkamhi & Latchezar Popov & Raunaq S. Pungaliya, 2023. "Financial maintenance covenants in bank loans," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(4), pages 1197-1255, November.
    5. Kariya, Ankitkumar, 2022. "Earnings-based borrowing constraints & corporate investments in 2007–2009 financial crisis," Journal of Corporate Finance, Elsevier, vol. 75(C).
    6. Quang Linh Huynh & Mohammad Enamul Hoque & Perengki Susanto & Waqas Ahmad Watto & Maryam Ashraf, 2022. "Does Financial Leverage Mediates Corporate Governance and Firm Performance?," Sustainability, MDPI, vol. 14(20), pages 1-20, October.
    7. Dongshu Jiang & ZhiXing Ni & Yuxiu Chen & Xue Chen & Chaohong Na, 2022. "Influence of Financial Shared Services on the Corporate Debt Cost under Digitalization," Sustainability, MDPI, vol. 15(1), pages 1-17, December.

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