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Measuring the probability of financial covenant violation in private debt contracts

Author

Listed:
  • Demerjian, Peter R.
  • Owens, Edward L.

Abstract

We measure the probability that a borrower will violate financial covenants in private debt contracts. We analyze hand-coded data and specify standard covenant definitions using Compustat data that minimize measurement error for all individual Dealscan covenants. We use these definitions to create a measure of aggregate probability of violation, which can be used across all covenants in a loan or among covenant subsets of interest. We provide evidence that our aggregate probability measure is superior to alternatives used in prior literature.

Suggested Citation

  • Demerjian, Peter R. & Owens, Edward L., 2016. "Measuring the probability of financial covenant violation in private debt contracts," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 433-447.
    • Handle: RePEc:eee:jaecon:v:61:y:2016:i:2:p:433-447
    DOI: 10.1016/j.jacceco.2015.11.001
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    More about this item

    Keywords

    Debt covenants; Dealscan; Covenant violation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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