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The signaling role of covenants and the speed of capital structure adjustment under poor creditor rights: Evidence from domestically and cross-listed firms in Brazil

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  • Albanez, Tatiana
  • Schiozer, Rafael

Abstract

This paper studies how covenants affect the speed of capital structure adjustment in Brazil, an environment with poor creditor rights. Unlike previous evidence for developed countries, we find that the existence of debt covenants increases the speed of capital structure adjustment by more than 20% for firms that are only domestically listed. For firms that are cross-listed in the US, this effect is smaller (if any), possibly because these firms “bond” to the stricter regulation and creditor protection of the US market. Our results suggest that in emerging markets with poor creditor protection, covenants are an imperfect substitute for strong creditor rights and employed as a signaling device, permitting firms to adjust their leverage towards optimal levels quicker.

Suggested Citation

  • Albanez, Tatiana & Schiozer, Rafael, 2022. "The signaling role of covenants and the speed of capital structure adjustment under poor creditor rights: Evidence from domestically and cross-listed firms in Brazil," Journal of Multinational Financial Management, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:mulfin:v:63:y:2022:i:c:s1042444x21000281
    DOI: 10.1016/j.mulfin.2021.100704
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    More about this item

    Keywords

    Optimal capital structure; Creditor rights; Cross-listing; Institutional environment; Speed of adjustment; Adjustment costs; Waivers;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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