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The aftermath of covenant violations: Evidence from China's corporate debt securities

Author

Listed:
  • Xu, Guang
  • Zhang, Xiaoyan

Abstract

We document a sharp and persistent decline in bond issuances following covenant violations also called technical defaults. However, we find no evidence that firms’ investment and performance change after technical defaults. Furthermore, we document that most of the technical defaults are waived off by bondholders through the debenture holders’ meetings. Although covenants serve as tripwires for renegotiation between bond issuers and investors, control rights are rarely transferred from shareholders to bond investors following technical defaults.

Suggested Citation

  • Xu, Guang & Zhang, Xiaoyan, 2024. "The aftermath of covenant violations: Evidence from China's corporate debt securities," Journal of Empirical Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s092753982400063x
    DOI: 10.1016/j.jempfin.2024.101528
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    More about this item

    Keywords

    Bond covenant; Technical default; Investor protection;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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