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Trust and use of covenants

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  • Cao, Mengyi
  • Xia, Qing

Abstract

This paper provides new evidence on how cultural norms affect contract design in international transactions. By using a comprehensive dataset on Yankee bonds, we find that bond contracts include more covenants when the issuer comes from a country with a lower level of trust. This substitution effect between trust and contractual detail holds after controlling for a variety of controls in country, firm and security level. The findings suggest that foreign firms can write sophisticated contracts that overcome the shortage of trust and facilitate the access to global capital markets.

Suggested Citation

  • Cao, Mengyi & Xia, Qing, 2021. "Trust and use of covenants," Research in International Business and Finance, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:riibaf:v:57:y:2021:i:c:s0275531921000441
    DOI: 10.1016/j.ribaf.2021.101423
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