IDEAS home Printed from https://ideas.repec.org/a/wsi/tijaxx/v59y2024i02ns1094406024500100.html
   My bibliography  Save this article

Balance Sheet Debt Covenants and Seasoned Equity Offerings

Author

Listed:
  • Kamran T. Malikov

    (Department of Accounting, Southampton Business School, University of Southampton, Southampton SO17 1BJ, UK2UNEC Accounting and Finance Research Center, Azerbaijan State University of Economics (UNEC), Baku, Azerbaijan)

Abstract

SynopsisThe research problemThis study examined the effect of having debt contracts that contain balance sheet covenants on the decision to make seasoned equity offerings (SEOs).MotivationPrior studies examined the determinants of equity issuance without considering private debt contracts that contain balance sheet covenants. Generally, firms are not restricted from stock issuance when they have financial debt covenants. This might motivate firms to make SEOs when they are more susceptible to balance sheet debt covenant violations. Making SEOs increases firms’ equity capitals in the short term and, therefore, has the direct effect of improving balance sheet covenants in the current period. This effect motivated this study to examine whether firms are more likely to conduct SEOs when their debt contracts include more-restrictive balance sheet covenants.The test hypothesisThe hypothesis of the study is in the null form, which states that balance sheet covenant restrictiveness is unrelated to the probability of conducting SEOs.Target populationThe target population includes shareholders, debtholders, and firm managers.Adopted methodologyPanel data estimation was used, specifically, the fixed effects model.AnalysesThe empirical analysis was conducted on a unique sample of UK listed firms with private debt covenants that is hand-collected from annual reports. Equity issuance in the sample is based on private placements, which are a common type of SEO in the UK. The restrictiveness of balance sheet-based covenants is defined as the number of balance sheet covenants in a loan contract or the tightness of net worth covenant slack.FindingsThe results show that balance sheet covenant restrictiveness is positively associated with the probability of conducting SEOs through private placements. The baseline result is robust to the application of a number of the controls often used in the literature, including cash shortage, the use of balance sheet covenants in the previous loan contract, earnings management, and the quality of external governance. It is also robust to excluding the financial crisis period and addressing potential endogeneity concerns using a propensity score-matching procedure. Additionally, further analysis provides some evidence that equity issuance by firms with more-restrictive balance sheet covenants is negatively associated with future operating performance, suggesting that these firms may not efficiently use the raised capital.

Suggested Citation

  • Kamran T. Malikov, 2024. "Balance Sheet Debt Covenants and Seasoned Equity Offerings," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 59(02), pages 1-42, June.
  • Handle: RePEc:wsi:tijaxx:v:59:y:2024:i:02:n:s1094406024500100
    DOI: 10.1142/S1094406024500100
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S1094406024500100
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1142/S1094406024500100?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Seasoned equity offerings; equity issuance; debt covenants; balance sheet financial covenants;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:tijaxx:v:59:y:2024:i:02:n:s1094406024500100. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: https://www.worldscientific.com/worldscinet/tija .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.