Download The Use of Debt Covenants in Public Debt: The Role of

The Use of Debt C ovenants in Public Debt: Th e Role of Accounting Qu ality
and Reputation
Joy Begley
Sauder School of Business
University of British Columbia
[email protected]
Sandra Chamberlain
Sauder School of Business
University of British Columbia
[email protected]
20 February 2005
_____________________________________________
1. Introduction
The use of accounting numbers in lending agreements is considered to be an important
part of the demand for accounting. The accounting choice literature hypothesizes that managers
make accounting choices, such as manipulating net income, to avoid tripping accounting-based
loan covenants. Much of this body of research presumes that debt covenants are frequently used
and that the form of the covenants is standard boiler-plate. However, recent research by Begley
and Freedman [2004] calls into question the prevalence and importance of loan covenants. They
examine the use of accounting-based covenants in senior public debt issued in three different
time periods (the late 1970s, 1989-1993 and 1999-2002), reporting that covenant use has
declined sharply over the last three decades. In addition, they find that the form of debt
covenants appears to be shifting away from measures that can be affected by accounting choices
to measures that are closer to cash flows. While Begley and Freedman uncover some interesting
data regularities, they do not investigate explanations for this dramatic change.
This study is concerned with understanding what factors influence the choice of debt
covenants in public lending agreements and what has changed over time to alter the observed
distribution of covenants. Our analysis endeavors to explain cross-sectional covenant use with
traditional agency problem proxy variables, plus variables to indicate reputation and accounting
quality effects. We build on an existing literature that uses agency theory to explain debt
covenant use.1 This literature proposes that debt covenants are used to control conflicts of
interest between stockholders and bondholders. One possible explanation for why covenant use
1
See for example Smith and Warner (1979), Begley (1994), Begley and Feltham (1999)
and Nash, Netter and Poulsen (2003).
1
has changed over time is that the types of firms issuing public debt may have changed. There
have been many innovations to corporate financing alternatives over the last three decades. In
the late 1970s the high yield, junk bond market (Bond rated below BBB) came into vogue
attracting many high risk companies to the public debt market. This continued into the 1980s
with the onset of the LBO market. While in the 1990s there was an explosion in the use of asset
securitizations.2
It is therefore possible that, the earlier time periods saw riskier firms, with
more opportunities for agency problems, raising capital in senior public debt markets, but a
similar firm today is able to rely on other sources of financing3.
The market for public debt has therefore become much more specialized and increasingly
sophisticated over time. After nearly three decades of dealing with high yield debt, investors are
better able to understand its performance and risks relative to investment grade debt (bonds rated
BBB and above). The decline in covenants reflects a movement away from contractual control
of agency problems. If firms are returning frequently to debt markets to issue more public debt,
then concerns about their future reputation and the interest rate they will have to pay on their
return can be act as an indirect control on their behavior. Rating agencies play a role in this type
of monitoring. Firms that maintain a high debt rating are able to borrow at more attractive
2
Dechow, Myers and Shakespeare (2004) report that the market for asset securitizations
has grown from $2.4 trillion in 1995 to $6.8 trillion in 2003. They note that manufacturing and
retail firms often rely on securitization of receivables as a means of financing. This type of
financing is typically raised through the use of a special purpose entity, moving the asset and the
debt off the balance sheet and outside of the legal control of the original company.
3
Smith and Warner (1979) suggest that issuing secured debt can be considered a
substitute for using covenants to control agency problems. Asset securitization creates a claim
on the securitized assets that is similar to the claim of secured debt. The protection to lenders is
even greater than that of secured debt because the cash flows from the assets are not
intermingled with the cash flows of the rest of the firm.
2
interest rates than firms in lower rating categories. Rating agencies monitor firms and adjust
ratings downward as default risk increases - indicating agency problems of debt have become
more severe. Arguably, the incentive to maintain a high debt rating will help to control
managements’ incentive to increase the risk of existing debt and this should be more important
for firms that frequently return to debt markets for financing. We investigate whether a firm’s
frequency of issuing debt can be used to explain the absence of covenants.
Accounting quality has received considerable attention within the accounting literature,
particularly with respect to its impact on cost of equity and to a lesser extent the cost of debt.4
Watts (2003) argues that debt holders value accounting conservatism as it provides a lower
bound, liquidation value, on which to contract. This view, that covenants written using
conservative accounting figures are of higher value, implies that for a healthy firm it is relative
low cost to renegotiate a binding covenant. We explore an alternative view on accounting
quality. The accounting ratios used in debt covenants provide a signal to lenders about firm
health. If these signals become too noisy in either direction (both aggressive and conservative
accounting), we expect their use to decline. We explore this issue with a balance sheet measure
of firm-specific signal to noise ratio and investigate its ability to explain covenant use.
We use the same debt covenant sample as in Begley and Freedman (2004), but expand
4
Ahmed et al. (2002) and Zhang (2005) examine the relation between various measures
of accounting quality and the interest rate paid by a firm on its borrowing. Zhang (2005)
examines whether a Basu (1997) measure of conservatism can be used to explain lower yield
spreads in private debt and finds evidence that more conservative reporting is associated with
lower spreads. Ahmed et al. (2002) examine two measures of discretionary conservatism, an
accrual measure based on Givoly and Hayn (2000) and an adjusted market-to-book measure
based on Beaver and Ryan (2000). They find that debt ratings (which they use as a proxy for
interest cost) are more favorable for firms with more discretionary conservatism.
3
the final sample to cover a longer time period. We find evidence that traditional agency problem
proxy variables such as cash flows and leverage continue to explain covenant use. When we add
our reputation variable we find consistent evidence that firms that value reputation are less likely
to include covenants in the last two periods. The results regarding our accounting quality
hypotheses are mixed. In the first two periods accounting quality does not appear to impact
covenant choice in the manner we predict, while in the final period there is evidence that
covenants are more frequently used when accounting is less conservative, i.e. market values are
closer to book values. This is counter to Watts (2003) prediction.
This pap er contributes to the literature on debt co ntracting in a nu mber of w ays. Nash, N etter,
and Poulson (2003)
examine how cross-sectional variation in covenant use can be explained by
firms desiring financial flexibility. In this paper we are able to examine this hypothesis over
time and to examine the added role of reputation and accounting quality. This is the first study
we are aware of that considers the impact of reputation on debt contracting. Prior studies that
have looked at accounting quality and debt look at whether firms with conservative accounting
are rewarded with lower cost debt, but they do not examine whether the public debt of such firms
is more likely to include covenants. In this study we are able to explore this question.
In the next section we look at how the use of debt can result in agency problems and the
tradeoffs in using restrictive covenants to control those problems. The empirical model is
presented in section three and the sample is described in section four. In section five we test the
hypotheses and section five provides our conclusions and directions for future work.
4
2.
Background and Hypothesis Development
2.1 Agency Problems and Debt
In this study we are interested in the role of accounting based debt covenants in public
debt. These covenants are predominantly restrictions on the payment of dividends and on new
borrowing. To understand when these covenants are likely to be used we must first consider the
broader agency setting in which they arise.
The existence of risky debt in a firm’s capital structure motivates management, acting on
behalf of shareholders5, to take actions that are not in the best interest of the firm as a whole. For
example, once risky debt is outstanding shareholders would prefer that managers pay higher
dividends, invest in riskier assets and use more leverage than what they would have preferred if
the firm were all equity financed.6 These actions increase the riskiness of the outstanding debt,
causing it to decline in value. In this way, equity holders do not bear all of the increased risk
associated with these actions.
The magnitude of potential agency costs varies based on the characteristics of the firms
assets. A firm with its assets already in place is likely to be less subject to agency problems
compared to a firm that has yet to fully determine its investment strategy. In addition, the option
like nature of equity means that shareholders’ have a greater incentive to take value reducing,
risk increasing actions as the risk of bankruptcy increases.
Companies with high risk assets will tend to favor equity financing over debt financing to
5
Begley and Feltham (1999) relax the assumption that managers act as if they hold all of
the equity in their firm. The alignment of management and shareholder interests is typically
assumed by researchers examining conflicts of interest between debt and equityholders.
6
Smith and Warner (1979).
5
completely avoid the agency costs associated with debt. To the extent that debt financing has
associated benefits, and agency problems are not excessive, some firms will choose to use debt
and deal with the agency problems that arise. One possibility is that debt is issued at a price that
fairly reflects anticipated agency costs of management’s uncontrolled behavior. If shareholders
can establish a reputation for acting in the interest of the firm as a whole, rather than on their
own behalf, then a desire to maintain this valuable reputation for fair dealing could control ex
post opportunism.7 Alternatively, agency costs can be reduced through a variety of debt
contracting features.8 Agency costs associated with debt can be reduced (but not necessarily
eliminated) by issuing shorter term debt, issuing secured debt, transferring ownership rights to
the lender (i.e. a sale and lease back arrangement) and moving the debt and the assets that will be
used to service the debt to a separate company. Restrictive debt covenants, the focus of this
study offer another means to reduce agency costs associated with debt.9 In general, these
mechanisms are not likely to reduce agency costs entirely. However, they can be used in
combination to minimize the problem.
2.2 Covenants as a Specific Control for Debt-related Agency Problems
Holding constant the other control mechanisms, we now turn to consideration of what
determines debt holders demand for covenants and management’s willingness to agree to include
7
There are numerous references in the literature to the value of reputation in controlling
agency costs. For example, Milgrom and Roberts (1992) on page 257 cite Adam Smith’s
Lecture on Justice, Police, Revenue, and Arms, Edwin Cannan, ed. (New York: Augustus M.
Kelley, 1964) which argues the greater a merchant’s volume of business the greater the incentive
to act honestly to protect his or her reputation.
8
Jensen and Meckling [1976] and Smith and Warner [1979].
9
This is not an exhaustive list of control mechanisms. For example, bank monitoring and
restrictive covenants in private debt issues may provide indirect protection to all lenders.
6
them. This discussion will ultimately lead us to a discussion of the role of accounting quality in
debt contracting and the choice of control variables to include in our analysis.
Two factors that are expected to impact supply and demand for debt covenants are (i) the
inherent magnitude agency costs implicit in the firm’s assets; and (ii) the ability of the covenants
to detect or miss agency problems when they exist (i.e. the likelihood of a Type I error); versus,
the likelihood that a covenant will be triggered when an agency problem does not exist (i.e. a
Type II error) and the implication for restricting management’s actions. The first factor indicates
which firms are expected to benefit more from including a covenant. The second factor
incorporates the tradeoff between Type I and Type II errors and the cost each imposes on the
firm. These factors are not independent. Firms that are more likely to face agency problems
stand to benefit more from the inclusion of covenants, however, they may also face higher costs
due to the imprecision of the covenants.
With regard to the first factor, the inherent magnitude of agency costs, prior studies have
examined the choice of accounting based debt covenants based on anticipated agency problems.
Future agency problems are likely to be larger the greater the uncertainty about the future
payoffs to the firm and the associated higher likelihood of corporate failure. Studies have
included variables such as volatility of cash flows, indicators of high growth and bankruptcy
predictors as proxy variables for when agency problems are likely to be more severe and
covenants more beneficial.
The importance of Type 1 and Type 2 errors depends on the type debt (public vs.
private), and the type of firm that is borrowing the money. Public debt covenants are typically
written to restrict management’s actions (e.g. the payment of a dividend or the issuance of
7
additional debt) if a particular accounting condition arises.10 Ideally a covenant only becomes
binding, when conditions have shifted such that without the covenant restriction management
would prefer the restricted action which reduces overall firm value.
Covenants based on accounting numbers are likely to be blunt instruments for identifying
and controlling these agency costs. On the one hand there is the danger that a covenant will fail
to identify some cases of agency problems (Type I error). This could occur either because
GAAP accounting is unable to capture the shift in the underlying economics or because
management discretion over reported figures allows strategic avoidance of default. Note that
theoretically the likelihood of these Type I errors occurring should be priced by debt holders.
Studies that view conservative accounting rules as preferable for debt contacting (Watts (2003),
Zhang (2005)) are focused on a setting where the goal is to minimize Type I errors.
As Type I errors are reduced Type II errors are likely to increase. Recall that Type II
errors occur when agency problems are not present, but the covenant becomes unintentionally
binding and prevents management from taking firm value increasing actions. Type II errors will
be costly if they force management to take actions that are not in the interest of the firm as a
whole. For example, a binding dividend restriction prohibits dividends, even if returning cash to
shareholders is of greater value than retaining cash in the firm. A binding additional borrowing
covenant will prevent the firm from raising additional debt. This could be extremely costly to a
firm facing positive NPV investment projects and with insufficient internal funds or new equity
available to finance the projects. Type II errors will be costly if they restrict management
10
This is substantially different from the type of covenant observed in private debt, where
a covenant default gives the lender the option to accelerate debt repayment.
8
flexibility to take firm value increasing actions.
These Type II error costs are likely to be greater for growth firms with greater
uncertainty about their future prospects, than for firms that already have the majority of their
assets in place.11 Private debt may be less subject to these costs because the lender has the
ability to monitor the firm and grant a default waiver if a covenant default occurs when the firm
is healthy and not subject to agency problems of debt. However, the covenants in public debt
cannot be waived as easily because the lenders are disperse and the contract typically requires
that a covenant change be approved by at least 2/3 of the outstanding debt.
An important insight is that the cost of lost flexibility that is associated with minimizing
Type I errors implies that conservative accounting may not be ideal for all firms’ writing debt
contracts. The sum of Type I error costs and Type II error costs are the total agency costs of
debt. Accounting based debt covenants, and other control mechanisms will be used if they can
reduce this total. The accounting methods that are best able to reduce this total are not
necessarily the ones the accounting literature has labeled as high quality accounting.
2.3 Accounting Quality and Debt Contracting
Francis, LaFond, Olsson and Schipper (2004) examine seven earnings attributes that have
been characterized as desirable features of earnings. They look at four accounting-based
attributes: accrual quality, persistence, predictability, and smoothness; and three market-based
attributes: relevance, timeliness and conservatism. These measures are all based on accounting
numbers from the income statement, however, the value of the income statement in debt
contracting is not clear. To the extent that agency problems are anticipated when firm value
11
Begley (1994) and Nash, Netter, and Poulson (2003)
9
declines and the likelihood of corporate failure becomes a major concern then debt covenants
will be more valuable if they can identify this condition. The earnings number reported in a
single year is not likely to be as important in identifying potential agency problems as is the
stock of wealth that shareholders have invested in the firm. As shareholders’ interest in the firm
declines, agency costs of debt are more likely to arise. This implies that a debt covenant based
on the ratio of debt to market value of equity might provide a better indicator of agency
problems.
We do not observe such a measure in debt contracts, possibly because the market value
of equity is subject to fluctuations that are outside of the control of the firm’s managers. If a
debt covenant that tracks a firm’s market based leverage ratio is better able to reduce agency
costs, and if debt contracting cannot be based on market values directly, then accounting
numbers will be better suited for debt contracting when the ratio of market value to book value
of equity is close to one.
2.4 Hypotheses and Measurement
The discussion in this section, leads to a number of hypotheses. Firms with different
types of assets are more or less likely to experience agency problems of debt due to the inherent
nature of their assets:
H1: The use of accounting-based debt covenants is positively related to the level and volatility of
a firm’s cash flows and to its likelihood of corporate failure.
We use the standard deviation of EBITDA to proxy for the volatility of cash flows and
we use leverage to measure the risk of corporate failure. We also include the collateral value of
fixed assets to measure assets-in-place, which is assumed to indicate a lower risk of debt default
10
and corporate failure.
If Type I errors are more costly to firms than Type II errors, as is assumed in studies that
examine the effect of accounting quality on debt pricing (Zhang (2005) and Ahmed et al.
(2002)), then firms using more conservative accounting will be able to write more efficient
covenants. This leads to the following prediction:
H2: The use of accounting-based debt covenants is positively related to the extent to which a
firm’s accounting is conservative.
We use the natural log of market value of equity over book value of equity to proxy for
accounting conservatism.12 A higher market-to-book ratio indicates that accounting book values
are conservative relative to the market’s valuation the equity.
If accounting quality for debt contracting is based on proximity of accounting book value
to market value rather than on conservatism then this implies a different predication:
H3:
Firms with a market to book value ratio closer to one will be more likely to include
accounting based debt covenants.
This hypothesis differs makes the same prediction as hypothesis H2 when book values
are aggressive (i.e. when market value of equity is less than book value) but makes an opposite
prediction when accounting is conservative (i.e. when market values exceed book values). In
order to test hypothesis H2 and H3 jointly, we estimate separate coefficients on the log of
market-to-book value of equity depending on whether market-to-book is above or below one. If
conservative accounting makes contracting less costly then both coefficients should be positive.
12
The analysis in this paper only examines one measure of accounting quality. We are in
the process of considering other measures for inclusion. We are currently collecting the data to
estimate the Basu (1997) measure of conservatism.
11
If proximity of market values to book values makes contracting less costly then the coefficient
on conservative accounting will be negative and the coefficient on aggressive accounting will be
positive.
The ratio of market-to-book is also likely to reflect a firm’s growth opportunities. For
growth firms, accounting-based covenants are expected to be costly because of the reduction in
financial flexibility. However, growth firms typically face an uncertain future, increasing their
likelihood of becoming distressed and making the benefits of including accounting-based
covenants potentially greater. It is unclear which effect will dominate. Nash et al. (2003) find
that growth firms use less covenants, indicating the desire for financial flexibility dominates. If
this is true in our sample as well, then we expect conservatism to interact with growth. In these
cases conservatism is no longer desirable and H2 is less likely to hold. We include R&D
expense to total assets and average sales growth over the past five years to proxy for growth
opportunities.
As discussed earlier agency costs can be controlled by a firms desire to maintain a
reputation for honest dealings with debt holders. A firm that returns regularly to public debt
markets to raise more financing stands to gain more from maintaining its reputation and thereby
being able to sell its debt at a higher price (pay a lower coupon) compared to another firm that
issues public debt infrequently. If the value a firm places on its reputation helps to control
agency problems then firms that return regularly to debt markets are less likely to use debt
covenants to control agency problems, leading to the following prediction:
H4:
Firms that are regularly issuing public debt are less likely to include debt covenants.
We measure the number of other public debt issues (non-subordinated, non-convertible, senior
12
public debt) the firm makes during the same sample period to indicate how regularly the issuing
firm returns to public debt markets.
3.
Methodology
Consistent with prior studies we use a combination of default risk variables and growth
measures to predict covenant use. We add to these variables, proxies for reputation and
accounting quality to investigate their incremental explanatory power. The dependent variable,
covenants, is a zero-one dichotomous variable, therefore we use a logit regression model to
investigate the relation of covenants with our hypothesized explanatory variables.
Based on the discussions and hypotheses in section 2 our model takes the following form:
where: Collat
=
Net PPE / Total assets;
R&D
=
Research and Development Expense / Total assets;
SalesGrwth
=
(Sales t - Sales t-1 ) / Sales t-1
EBITDA
=
Operating income before depreciation / Total assets;
Volatility
=
Standard deviation of Operating income before depreciation / Total
assets;
BVLev
=
Total Debt / Total assets;
ActgCons
=
Ln(MVE/BVE) * Dummy indicating if MVE/BVE >1.0;
ActgAggr
=
Ln(MVE/BVE) * Dummy indicating if MVE/BVE <1.0;
Reputation
=
1 if the issuing firm made more than one debt issue during the
sample period, 0 otherwise.
All variables other than Volatility and Reputation are measured as the arithmetic mean of the
variable over five years prior to the debt issue date (or as many years as there are available on
COMPUSTAT).
13
Hypothesis H1 predicts the coefficients on Collat and EBITDA will be negative and the
coefficients on Volatility and BVLev will be positive. Hypothesis H2 predicts a positive
coefficient on ActgCons and ActgAggr, while hypothesis H3 predicts a negative coefficient on
ActgCons and a positive coefficient on ActgAggr. The coefficient on Reputation is predicted to
be negative under H4.
4.
Sample and Data
We examine public debt contracts from three time periods: 1975-1979; 1989-1993; and
1999-2002 restricting our analysis to new issues of straight debt13 by industrial companies
reported in the “Directory of Corporate Financing 1970-1980 Decade” or in the electronic
equivalent, Securities Data Corporation new issues data base. We hand collect debt contract
information directly from indentures or prospectuses. The 1989-1993 and 1999-2002 samples
contain both notes and debentures14, while the 1970s sample, obtained from a previous study,
contains only debentures.
The 1970s sample was previously examined in Begley and Feltham (1999). They make an
alphabetical list of all new public debentures issued between 1975 and 1979 and select every
second debt issue and limit their sample to one debt issue per firm. This results in a final sample
13
Convertible, guaranteed, subordinated, and variable rate public debt are excluded
because these features may act as substitutes for covenants. Excluding them from the sample
avoids variation in these features over time and reduces the sample to a manageable size for hand
collecting covenants. If these features substitute for covenants then the excluded debt issues are
likely to use fewer covenants than the debt issues in the sample.
14
What distinguishes a note from a debenture is term to maturity of the debt issue.
Debentures typically have an initial term to maturity of between 15 to 30 years. Notes typically
have a term to maturity of ten years or less. Ideally, the 1970s sample would also include notes.
However, contracts from the 1970s are not available electronically, making it extremely costly to
collect the prospectuses governing these notes.
14
of 90 debenture issues. The 1989-1993 sample includes one randomly-selected new public debt
issue per firm for a total of 283 new issues (86 of which are debentures). The most current sample
is selected in the same manner as the 1989 - 1993 sample, but from the period 1999-2002,
resulting in a sample of 250 debt issues (including 14 debentures).15 Ideally we would select all
three samples using a common procedure. But because the 1970s sample is drawn from an earlier
study its selection procedure differs from the random-sampling procedure used in the two later
samples. The main difference between the first sample and the two later samples is that it
consists entirely of debentures. It is not clear whether notes or debentures are likely to use more
covenants.
The firms issuing public debt of the type examined here comprise only a small fraction of
all publicly-traded companies during each of our sample periods. Our samples exclude nonindustrial firms and firms issuing public debt with specialty features like a conversion option or
subordination. However, the low numbers also reflect that many firms rely entirely on private
debt and equity to finance their operations.
Debt issue data is obtained from SDC Platinum and accounting data is obtained from
Standard and Poor’s COMPUSTAT. Table 1 describes the debt issue characteristics by sample
period. We find, as do Begley and Freedman (2004), the incidence of covenants is decreasing
across the three sample periods. The existence of an accounting-based covenant restricting
dividend payments (DIV) has dropped from 39% of debt issues in the late 1970's to 25% of issues
15
The first and second samples are the same as in Begley and Freedman (2004), the third
sample is larger than their sample as it includes debt issues over a longer time period (19992002) than they examine (1999-2000). In randomly selecting the larger sample some of the
original debt issues are replaced by other debt issues by the same firm in the later time period.
15
in the second period, and finally to only 9% of debt issues in the most recent sample.16 The
restriction on additional borrowing (DEBT) has seem a similar decline.
The variable COVENANT is set to equal 1 if either the dividend or the additional
borrowing covenant are present. Given the high degree of overlap between the DIV and DEBT
covenants, we will perform our analysis on COVENANT rather than on the individual covenants.
The mean time- to- maturity also declines across the three sample periods. A decline from
period one to two is to be expected, because the first sample is made up entirely of debentures
which have a longer term-to-maturity. The decline from period two to period three is also
consistent with a further decline in debentures from 30% of sample two to 6% of sample three.
Average debt ratings are similar in the second and third sample periods, but are significantly
higher in the earliest period. The higher debt ratings imply a lower risk default in the 1970s
sample period. The median debt issue size as a percentage of debt both prior to and following the
issue shows weak evidence of a reduction in debt issue size over the three time periods.
Table 2 provides descriptive statistics on the firms issuing the sample debt issues. Firm
characteristics are measured based on their average value during the five years prior to the date of
the debt issue. Leverage relative to total assets is higher in periods two and three than in the
earliest period, but it does increase between periods two and three. In contrast, leverage relative
to the market value of assets (which is defined as market value of common equity plus book value
of liabilities and preferred stock) does not change between the first two periods but it declines
significantly in period three. This difference in direction for leverage reflects the fact that market
16
Looking at debentures only the drop off is even more dramatic. Only 4% of debentures
in the middle period have a dividend restriction and none of the debentures in the final period
include this covenant.
16
values are much higher at the end of the1990s than in earlier times. The higher market values for
sample three is due, in part, to a change in the nature of firms issuing debt in period three and
partly due to an increase in market-to-book ratios across all firms including our sample firms.
Firm size, measured by total assets adjusted for inflation17, is also higher in period three, but it
does not change significantly in the first two periods. There is very little change in ability to
generate cash flows, measured by EBITDA to assets or collateral value of assets, measured by
Net PPE to assets, across the three sample periods. However Volatility of cash flows declines
between period one and two, indicating a decrease in default risk. R&D spending as a percentage
of assets and sales growth does not change significantly between the second and third sample
periods but the median declines between periods one and two, suggesting that firms in the later
two periods are not growing as fast as in the first period. This result is in sharp contrast to the
increase in market-to-book ratios across the three sample periods. The higher market-to-book
ratios are also leading to higher conservatism measures between periods one and two and between
two and three, while aggressive accounting appears to have declined from what it was in period
one. Finally reputation appears to be more important in the later two periods compared to the
earlier period. In the earlier period about two thirds of companies had only one debt issue during
the sample period, but in the later two periods over half of the companies made multiple debt
issues.
Rank correlations are reported in Table 3. Group 1 correlations are reported in Panel A.
In the first period sales growth and R&D spending are significantly positively correlated with
market-to-book in this period suggesting they are all capturing similar aspects of growth. Panel B
17
The GNP index is used to adjust total assets to dollars in 2002.
17
reports period two correlations. Sales growth and market-to-book are also significantly positively
correlated in this period, but R&D spending is not. In period three R&D spending, sales growth
and market-to-book are not significantly correlated, indicating that the market is valuing
something other than rents from R&D spending and an extrapolation of historical growth rates.
5.
Logistic Analysis
The logit results are reported in Table 4. For the earliest sample period (reported in Panel
A) a number of base model variables are significant in explaining covenants. Sales growth, and a
book value measure of leverage are significantly positively related to covenants, while collateral
value of assets and EBITDA are negatively related. These relations are in the direction predicted.
The positive correlation with size suggests that firms experiencing growth are subject to higher
agency problems causing them to use more covenants. The negative relation with collateral value
of assets and EBITDA indicates that profitable firms and those with their assets in place are less
concerned about agency problems of debt. When the accounting quality and reputation variables
are added to the base model, results for the base model variables are very similar and the
additional variables are not significant.
Results for the second sample period are reported in Panel B of Table 4. In the base
model leverage is significantly positively related to covenants, while EBITDA and R&D
spending are significantly negatively related to covenants. The significant negative relation with
covenants suggests that firms growing through R&D spending value their financial flexibility and
therefore less likely to use covenants. In the second sample period, the reputation variable is
significantly negative as predicted, indicating that reputation may be substituting for covenants
for firms that are making multiple debt issues. The accounting quality variables and not
18
significant when added to the base model. When all variables are included in the final model,
aggressive accounting is significantly negative, counter to our prediction.
In the third sample period volatility of EBITDA and leverage are significantly positively
related to covenants and EBITDA is significantly negatively related to covenants, consistent with
our predictions regarding risk of corporate failure. When reputation is added to the model it is
again significantly negative as predicted. When the two accounting quality measures are added,
conservative accounting is significantly negatively related to covenants. This result does not
support H2, the prediction that conservative book values are preferred for debt contracting, but
rather it does support H3, the prediction that book values closer to market value are more suitable
for debt contracting. However, the negative relation with conservative accounting, is also
consistent with this variable capturing the demand for financial flexibility in high growth firms.
Sales growth is not significant in the period three base model, but it becomes significantly
positive in the full model.
Overall the regression results indicate that underlying firm characteristics that proxy for
agency problems of debt continue to related to covenant use in all three periods. Significant
reputation effects are found in the second and third sample periods suggesting concerns about
maintaining bond ratings is substituting for covenants. The results for our accounting quality
measures are not strong, although there is some evidence in the third period that high market-tobook ratios (i.e. conservative book values) are not suitable for debt contracting.
6.
Conclusion
We have examined the determination of the existence of debt covenants in senior, public
debt issues over the period 1975-1979, 1989-1993, and 1999-2002. This analysis is motivated in
19
part by the sharp decline in the use covenants in public debt over these periods. We examine both
the explanatory power of “traditional” agency cost measures, and the explanatory power of two
previously unexplored factors: the role of reputation in implicitly controlling agency costs
associated with debt, and the role of changes in the quality of earnings.
In all three time periods we document that debt covenant use is related to traditional
variables that capture the riskiness of assets in place, and the likelihood of corporate failure.
Growth opportunities, as measured by research and development expenses and historical sales
growth, are positively related to covenant use in the earliest sample, are negatively related to
covenant use in the middle sample, and are unrelated to covenant use in the third period. Since
there are good theoretical arguments for growth to relate to covenant use with either a positive or
negative sign, our documented changes in the sign and significance of the coefficient over the
sample periods are not necessarily surprising.
We find that the relation between firm reputation (as measured by the frequency of debt
issues by our sample) and covenant use is zero in our first period and is negative in our second
two periods. This evidence is consistent with an increasing preference on the part of borrowers to
rely on implicit rather than explicit control mechanisms to mitigate agency costs in debt
contracting. This, we believe, is an intriguing result that warrants further investigation using
refined measures of reputation, and perhaps a supplemental analysis of the ability of debt rating
agencies to signal potential agency costs through ratings.
Our results on accounting quality appear to contrast with some accepted intuition on the
benefits of accounting conservatism. Most notably, across all three periods we find no evidence
that covenants are more likely when accounting is conservative (i.e., covenants are not more
20
likely when market to book ratios exceed 1.) This finding contrasts with Watts (2003) who
suggests that conservatism is beneficial in debt contracting. The finding also appears to contrast
with results in Ahmed et. al (2002) and with Zhang (2005) that find conservatism lowers the
interest rate charged to borrowers. We have argued that in public debt contracts, borrowers and
lenders are unlikely to be able to engage in low-cost renegotiation when a debt covenant is
tripped, and that Type II Errors can be costly to firms. Therefore, we do not view conservatism as
necessarily a favorable attribute for the sorts of debt issues we study, and we are not surprised
that conservatism is not associated with covenant use. However, there is obviously work to be
done to reconcile our findings with these prior studies which use different measures of
conservatism than we do and which investigate debt pricing rather than covenant use.
21
BIBLIOGRAPHY
Ahmed, A., B. Billings, R. Morton and M. Stanford-Harris (2002), “The Role of Accounting
Conservatism in Mitigating Bondholder-Shareholder Conflicts over Dividend Policy and
in Reducing Debt Costs”, Accounting Review, Vol 77 (No 4) pp. 867-890.
Basu, S. (1997) “The Conservatism Principle and the Assymetric Timeliness of Earnings”,
Journal of Accounting and Economics, Vol 24 (No 1), pp.3-37.
Begley, J. and G. Feltham (1999) “An Empirical Examination of the Relation Between Debt
Contracts and Management Incentives,” Journal of Accounting and Economics, Vol 27,
pp 229-259.
Begley, J. and R. Freedman (2004) “The Changing Role of Accounting Numbers in Public
Lending Agreements,” Accounting Horizons, Vol. 18 (No. 2) pp. 81-96.
Francis, J., R. LaFond, P. Olsson and K. Schipper (2004) “Costs of Equity and Earnings
Attributes”, Accounting Review, Vol 79 (No 4) pp. 967-1010.
Nash, R, J. M. Netter, and A. B. Poulson (2003) “Determinants of Contractual Relations Between
Shareholders and Bondholders: Investment Opportunities and Restrictive Covenants,”
Journal of Corporate Finance, Vol. 9, pp.201-232.
Smith, C. and J. Warner (1979) “On Financial Contracting: An Analysis of Bond Covenants”,
Journal of Financial Economics, Vol 7 pp 117-161.
Watts, R. (2003) “Conservatism in Accounting Part I: Explanations and Implications”,
Accounting Horizons, Vol 17, (No 3), pp. 207-221.
Zhang, J. (2005) “Efficiency Gains from Accounting Conservatism: Benefits to Lenders and
Borrowers”, Working Paper, Massachusetts Institute of Technology.
22
TABLE 1
Characteristics of Debt Contracts for Senior Public Debt Issued
in 1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group3)
Mean and (Median) Characteristics
Group 1
a
Group2
Group 3
Comparisons Across Groupsb
Group 2 less Group 3 less Group 3 less
Group 1
Group 1
Group 2
Fraction with
DIV Covenants
0.389
0.251
0.092
-0.138∗
-0.297∗∗
-0.159∗∗
Fraction with
DEBT Covenants
0.456
0.226
0.100
-0.229∗∗
-0.356∗∗
-0.126∗∗
Fraction with
Either COVENANT
0.467
0.265
0.100
-0.202∗∗
-0.367∗∗
-0.165∗∗
Term to
MATURITY
24.50
(25.00)
14.82
(10.00)
9.79
(9.90)
-9.679∗∗
-15.000∗∗
-14.714∗∗
-15.100∗∗
-5.035∗∗
-0.100∗∗
RATING
10.48
(11.00)
8.56
(9.00)
9.00
(9.00)
-1.919∗∗
-2.000∗∗
-1.482∗∗
-2.000∗∗
0.438
0.000
NEWDEBT
To Total Debt (-1)
0.594
(0.301)
0.736
(0.202)
1.331
(0.187)
0.142
-0.099∗∗
0.737
-0.113∗∗
0.595
-0.014
NEWDEBT
To Total Debt (+1)
0.305
(0.236)
0.269
(0.188)
0.207
(0.153)
-0.036
-0.048∗
-0.098∗∗
-0.083∗∗
-0.062∗∗
-0.035∗
90
283
250
Number Obsc
Group 1 is drawn from the set of unsecured, senior debt issues reported in ”Directory of Corporate Financing 19701980”, while Groups 2 and 3 are drawn from the Securities Data Corporation(SDC) new issues data base. Debt
contract information is hand-collected from indentures or prospectuses, and only one debt issue is drawn per firm.
DIV refers to instances where a debt contract restricts dividend payments; DEBT refers to those that restrict a
firms’ ability to issue additional debt; and COVENANT is set to 1 if either covenant exists. Term to MATURITY is
calculated as the number of days between the issue date and the maturity date, scaled by 365.25 days and rounded
to the nearest 10th. RATING translates debt ratings gathered from the SDC database to a scale from 1 to 12 where
12 indicates a higher rating, and therefore a lower interest rate. NEWDEBT is the face value of the debt issued. The
table reports this relative to total debt in at the nearest annual report date preceding the debt issue (year -1) and at
the nearest annual report date following the debt issue (year +1).
a
These columns report the mean and, in the row directly below the mean, the (median), of debt contract character-
istics by groups.
b
These columns report the differences in means or medians reported in the first three columns.
∗∗
,
∗
and
†
in-
dicate 1%, 5% and 10% significance for a test that the mean or median is the same across the two groups.
c
Due to lack of Compustat data, the number of observations drops to 90, 282, and 247 when we scale NEWDEBT
by total debt at the first year-end following a debt issue.
23
TABLE 2
Pre-issue Characteristics of Selected Firms That Floated Senior Public Debt in
1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group 3)
Mean and (Median) Characteristics
BVLev
Group 1
0.267
0.250
a
Group2
0.327
0.284
Group 3
0.302
0.285
Comparisons Across Groupsb
Group 2 less Group 3 less Group 3 less
Group 1
Group 1
Group 2
0.060∗∗
0.035∗
-0.025†
∗∗
∗∗
0.034
0.035
0.001
MVLev
0.251
0.233
0.237
0.215
0.192
0.169
-0.014
-0.018
-0.059∗
-0.064∗∗
-0.045∗∗
-0.046∗∗
Ln (Market Value Assets)
21.659
21.754
22.135
22.183
22.877
22.792
0.476∗
0.430†
1.218∗∗
1.038∗∗
0.741∗∗
0.609∗∗
Total Assets-GNP Adjusted
5,879
2,779
7,934
2,825
11,295
4,800
2,055
46
5,416∗∗
2,021∗∗
3,361
1,975∗∗
EBITDA
0.163
0.154
0.157
0.149
0.161
0.155
-0.007
-0.005
-0.002
0.001
0.004
0.006
Collat
0.424
0.418
0.409
0.387
0.379
0.334
-0.015
-0.030
-0.045∗
-0.083∗∗
-0.030†
-0.053∗
Volatility
0.055
0.044
0.038
0.032
0.043
0.033
-0.016∗∗
-0.012∗∗
-0.012∗∗
-0.011∗∗
0.004
0.001
EBITDA / Interest Exp
14.444
9.213
12.526
5.340
16.275
8.291
-1.918
-3.872∗∗
1.831
-0.921†
3.749
2.951∗∗
R&D Exp
0.017
0.008
0.016
0.000
0.018
0.001
0.000
-0.008∗∗
0.002
-0.007∗∗
0.002
0.001
SalesGrwth
0.183
0.149
0.133
0.096
0.157
0.088
-0.050∗
-0.053∗∗
-0.026
-0.060∗∗
0.023
-0.008
MV Assets/ Total Assets
1.276
1.052
1.504
1.312
2.073
1.681
0.228∗∗
0.260∗∗
0.797∗∗
0.629∗∗
0.570∗∗
0.369∗∗
MVE/BVE (Winsorized)
1.449
1.117
2.510
1.934
4.585
2.961
1.062∗∗
0.817∗∗
3.136∗∗
1.844∗∗
2.075∗∗
1.027∗∗
ActgCons
0.198
0.000
0.724
0.631
1.134
0.968
0.526∗∗
0.631∗∗
0.936∗∗
0.968∗∗
0.409∗∗
0.337∗∗
ActgAggr
-0.170
0.000
-0.014
0.000
-0.002
0.000
0.155∗∗
0.000∗∗
0.168∗∗
0.000∗∗
0.012
0.000
Num Debt Issues per Firm
1.47
1.00
2.86
2.00
3.452
2.00
1.396∗∗
1.000∗∗
1.985∗∗
1.000∗∗
0.590
0.000
Reputation
Number of Observationsc
0.367
90
0.527
283
0.596
250
0.160∗
0.229∗∗
0.069
24
TABLE 2–continued
Pre-issue Characteristics of Selected Firms That Floated Senior Public Debt in
1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group 3)
This table reports the pre-issue characteristics of firms that issued debt over three time periods. With the exception
of Number of Debt Issues/Firm, Reputation and Volatility we measure firm specific characteristics as the mean of
a given characteristic over the period that ends at the annual report date immediately preceding the debt issue,
and begins up to four years before that. Therefore, the mean value of BVLev for Group 1 of .267 is the average of
these five year individual firm means for Group 1 and the median of .250 is the median of these individual firm means.
Group 1 is drawn from the set of unsecured, senior debt issues reported in ”Directory of Corporate Financing
1970-1980”, while Groups 2 and 3 are drawn from the Securities Data Corporation(SDC) new issues data base.
Data items are defined as follows:
BVLev
Total Debt
MVLev
Market Value of Assets
EBITDA
Volatility
=
=
=
=
=
=
R&Dexp
=
SalesGrwth
MBE/BVE (winsorized)
=
=
ActgCons
=
ActgAggr
=
Num Debt Issues per Firm
Reputation
=
=
Total Debt/Total Assets
Long Term Debt plus Debt in Current Liabilities
Total Debt / (Market Value of Assets
Market Value of Equity plus Book Value of Liabilities and Preferred Stock
operating income, before depreciation divided by total assets
The standard deviation of operating income, before depreciation measured for up to 5
years before the debt issue divided by mean assets computed over the same period.
Research and development expense divided by total assets. If research and development
expense is missing it is set equal to zero.
((Salest − Salest−1 )/Salest−1
Market value of equity to book value of equity, winsorized at the top 2% of the distribution
when negative values are eliminated. Firm-years with negative MBE/BVE are set equal
to the top 2% of this distribution.
this is equal to the log(MVE/BVE winsorized)if MVE/BVE, winsorized, is greater than
1; this variable is zero otherwise.
this is equal to the log(MVE/BVE winsorized)if MVE/BVE, winsorized, is less than 1;
this variable is zero otherwise. Note that agressiveness increases as this variable declines
in value.
this is the number of debt issues a firm released during the period covered in its grouping.
1 if the issuing firm made more than one debt issue during the sample period, 0 otherwise.
a
These columns report the mean and, in the row directly below the mean, the (median), of debt contract characteristics by groups.
b
These columns report the differences in means or medians reported in the first three columns. ∗∗ , ∗ and
dicate 1%, 5% and 10% significance for a test that the mean or median is the same across the two groups.
c
†
in-
The number of observations is approximate. For example, The Market Value of Equity is availble for only 260
firms in Group 2 and for 247 firms in Group 3; Volatility is available for 89 firms in Group 1, for 274 firms in Group
2 and for 247 firms in Group 3.
25
Covenant
Maturity
Rating
Ln(MVE)
BVLev
EBITDA
Volatility
Collat
R&D
SalesGrwth
MV Assets/BV
ActgCons
ActgAggr
Maturity
-0.591∗∗
TABLE 3
Spearman Rank Correlations of Pre-issue Firm Characteristics and Debt Contracts
Debt
Rating
-0.680∗∗
0.522∗∗
-0.472∗∗
Ln (MVE)
-0.468∗∗
-0.458∗∗
0.437∗∗
BVLev
0.065
0.333∗∗
0.292∗∗
-0.310∗∗
EBITDA
0.005
0.022
0.046
-0.050
-0.140
Volatility
0.158
0.134
0.398∗∗
0.282∗∗
0.259∗
Collat
Assets
-0.299∗∗
0.007
0.274∗∗
-0.359∗∗
0.211∗
0.377∗∗
0.359∗∗
-0.393∗∗
R&D
0.235∗
0.602∗∗
0.352∗∗
0.066
-0.025
-0.011
-0.060
-0.070
SaleGrth
0.207†
0.166
0.357∗∗
0.587∗∗
-0.163
0.328∗∗
0.369∗∗
0.313∗∗
MV Assets
BV of Assets
-0.224∗
0.206†
0.073
0.121
0.221∗∗
0.254∗
0.029
0.183†
0.153
0.085
-0.155
ActgCons
0.740∗∗
0.414∗∗
0.023
0.242∗
0.366∗∗
0.441∗∗
0.070
0.187†
0.185†
0.159
-0.089
ActgAggr
0.039
0.150
-0.245∗
0.399∗∗
-0.012
-0.079
0.159
0.290∗∗
0.154
0.065
Num
Issues
-0.111
Panel A: Group 1–Number Obs is Approximately 90
0.770∗∗
0.756∗∗
-0.063
-0.403∗∗
0.448∗∗
0.274∗∗
-0.167
-0.118
0.416∗∗
0.556∗∗
0.023
0.197†
0.312∗∗
26
Covenant
Maturity
Rating
Ln(MVE)
BVLev
EBITDA
Volatility
Collat
R&D
SalesGrth
MV Assets/BV
ActgCons
ActgAggr
Maturity
-0.338∗∗
TABLE 3
Spearman Rank Correlations of Pre-issue Firm Characteristics and Debt Contracts
Debt
Rating
-0.682∗∗
0.207∗∗
-0.442∗∗
Ln (MVE)
-0.511∗∗
-0.045
0.317∗∗
BVLev
0.165∗∗
0.424∗∗
0.000
-0.366∗∗
EBITDA
-0.117†
-0.017
-0.023
-0.079
-0.028
Volatility
0.201∗∗
0.068
-0.003
0.023
0.051
Collat
Assets
-0.085
0.025
0.077
-0.260∗∗
0.343∗∗
0.332
0.083
-0.246
R&D
-0.141∗
0.388
0.070
-0.049
-0.064
0.026
0.019
-0.039
SaleGrth
-0.015
-0.039
0.152∗
0.682∗∗
-0.190∗∗
0.163∗∗
0.384∗∗
-0.029
MV Assets
BV of Assets
-0.253∗∗
0.142∗
-0.087
-0.059
0.094
0.458∗∗
0.010
0.141∗
0.188∗∗
-0.077
-0.093
ActgCons
0.125∗
0.061
-0.054
-0.027
0.122∗
0.068
0.055
0.093
0.033
-0.067
ActgAggr
0.081
0.130∗
0.060
0.029
0.134∗
0.066
0.490∗∗
0.362∗∗
0.214∗∗
Num
Issues
-0.345∗∗
Panel B: Group 2–Number of Observations is Approximately 263
0.248∗∗
0.656∗∗
-0.080
-0.240∗∗
0.194∗∗
0.126∗
-0.190
-0.142∗
0.249∗∗
0.084
-0.013
0.042
0.169∗∗
0.132∗
5
0.795∗∗
27
Covenant
Maturity
Rating
Ln(MVE)
BVLev
EBITDA
Volatility
Collat
R&D
SaleGrwth
MV Assets/BV
ActgCons
ActgAggr
Maturity
0.048
∗∗
,
∗
TABLE 3–continued
Spearman Rank Correlations of Pre-issue Firm Characteristics and Debt Contracts
Debt
Rating
-0.488∗∗
-0.134∗
-0.364∗∗
Ln (MVE)
-0.462∗∗
0.140∗
0.334∗∗
BVLev
0.130∗
0.497∗∗
-0.052
-0.259∗∗
EBITDA
-0.111†
-0.168∗
-0.118†
0.051
0.157∗
Volatility
0.145∗
0.069
-0.124†
-0.105†
0.229∗∗
Collat
Assets
-0.002
-0.120†
0.176∗∗
-0.282∗∗
0.326∗∗
0.331∗∗
-0.150∗
-0.169∗∗
R&D
-0.082
0.531∗∗
-0.144∗
0.027
-0.124†
-0.225∗∗
0.040
0.169∗∗
SaleGrth
0.223
-0.107†
0.213∗∗
0.663∗∗
-0.353∗∗
0.338∗∗
0.517∗∗
-0.114†
MV Assets
BV of Assets
-0.196∗∗
-0.074
0.218
-0.068
0.029
0.598∗∗
-0.114†
0.310∗∗
0.430∗∗
-0.036
-0.204∗∗
ActgCons
0.108
0.094
-0.011
0.090
-0.015
0.050
-0.062
0.106†
0.065
-0.104
-0.049
ActgAggr
-0.054
-0.113†
0.008
0.055
-0.229∗∗
-0.064
0.032
0.439∗∗
0.254∗∗
0.009
Num
Issues
-0.187∗∗
Panel C: Group 3–Number of Observations is Approximately 250
-0.099
0.571∗∗
-0.201∗∗
-0.285∗∗
0.181∗∗
0.145∗∗=
-0.272∗∗
-0.203
0.054
0.778
0.005
0.034
0.096
and
†
indicate where correlations are significant at the 1%, 5% and 10% levels.
Firm characteristics before the issue date are measured as the average measured at the annual report date just preceding the debt issue and up to four years earlier. These are
defined in Tables 1 and 2.
28
TABLE 4
Logistic Analysis of the Determinants of Covenants for Senior Public Debt
Issues in 1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group 3)
Covenant
=
α0 + α1 Collat + α2 R&D + α3 SalesGrwth + α4 EBITDA +
α5 Volatility + α6 BVLev + α7 ActgCons + α8 ActgAggr + α9 Reputation
Panel A: Group 1
Base with
Base with
Acctg Qual Reputation
-0.004
-0.621
-0.166
0.998
0.742
0.915
Base
Intercept
Base with
Both
-0.680
0.724
Collat
-8.625
0.000
-8.530
0.001
-7.954
0.002
-7.907
0.002
R&D
-13.970
0.278
-13.210
0.310
-14.469
0.262
-13.586
0.297
SalesGrwth
7.704
0.048
8.186
0.045
8.652
0.043
9.098
0.041
EBITDA
-1.444
0.040
0.210
0.978
-1.742
0.813
-0.322
0.968
Volatility
-18.306
0.145
-17.276
0.183
-21.059
0.111
-19.887
0.141
BVLev
14.013
0.000
14.508
0.000
14.635
0.000
15.113
0.000
ActgCons
-0.263
0.770
-0.317
0.728
ActgAggr
-0.504
0.663
-0.315
0.789
Reputation
Number Obs
89
89
29
-0.627
0.355
89
-0.606
0.381
89
TABLE 4–continued
Logistic Analysis of the Determinants of Covenants for Senior Public Debt
Issues in 1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group 3)
Covenant
=
α0 + α1 Collat + α2 R&D + α3 SalesGrwth + α4 EBITDA +
α5 Volatility + α6 BVLev + α7 ActgCons + α8 ActgAggr + α9 Reputation
Panel B: Group 2
Base with
Base with
Acctg Qual Reputation
-0.505
0.286
-0.221
0.450
0.705
0.744
Base
Intercept
Base with
Both
0.431
0.578
Collat
-0.923
0.310
-1.091
0.257
-0.745
0.450
-0.893
0.399
R&D
-19.831
0.088
-43.871
0.016
-16.104
0.152
-33.868
0.063
0.437
0.708
0.360
0.767
1.069
0.391
1.259
0.339
EBITDA
-17.349
0.000
-18.310
0.000
-15.906
0.000
-16.487
0.000
Volatility
8.998
0.272
10.768
0.198
6.894
0.405
6.930
0.413
BVLev
5.550
0.000
3.664
0.002
6.159
0.000
4.309
0.001
ActgCons
0.019
SalesGrwth
ActgAggr
0.039
0.952
0.904
-1.847
0.117
-2.466
0.051
Reputation
Number Obs
271
258
30
-1.757
0.000
271
-1.698
0.000
258
TABLE 4–continued
Logistic Analysis of the Determinants of Covenants for Senior Public Debt
Issues in 1975-1979 (Group 1), 1989-1993 (Group 2) and 1999-2002 (Group 3)
Covenant
=
α0 + α1 Collat + α2 R&D + α3 SalesGrwth + α4 EBITDA +
α5 Volatility + α6 BVLev + α7 ActgCons + α8 ActgAggr + α9 Reputation
Panel C: Group 3
Base with
Base with
Acctg Qual Reputation
-3.885
-6.226
-2.9631
0.001
0.000
0.0153
Base
Intercept
Base with
Both
-4.946
0.004
Collat
-0.745
0.570
-1.052
0.454
-0.6776
0.6306
-1.082
0.476
R&D
6.618
0.559
18.909
0.129
5.6949
0.6309
18.484
0.165
SalesGrwth
0.227
0.709
0.971
0.120
0.5626
0.4055
1.284
0.083
EBITDA
-20.585
0.006
-2.340
0.758
-21.7636
0.0065
-5.009
0.631
Volatility
23.498
0.008
17.316
0.053
20.0838
0.0352
13.863
0.172
BVLev
10.072
0.000
13.114
0.000
10.388
0.0001
12.906
0.000
ActgCons
-1.666
0.003
-1.576
0.009
ActgAggr
3.017
0.384
2.257
0.537
Reputation
Number Obs
249
246
-1.723
0.004
249
-1.687
0.009
246
This Table presents the point estimates of the estimated coefficients (multiplied by -1) from a logistic regression, with
the Chi-Square significance reported just below the coefficient. All variables used in these logit models are defined in
Table 2 and Table 1.
31