What's my style? Supply‐side determinants of debt covenant inclusion

Ma, Zhiming; Stice, Derrald; Williams, Christopher

doi:10.1111/jbfa.12588

Cited by 11 publications

(6 citation statements)

References 89 publications

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“…Additionally, regarding the reduction in information asymmetry, other authors have explored the function of debt covenants in mitigating the risk of fraud and bankruptcy [95]. A recent study has provided a novel perspective by investigating how companies assess the presence of debt covenants and their influence on seeking alternative financing sources [96].…”

Section: Methodsmentioning

confidence: 99%

Debt Sustainability Assessment in the Biogas Sector: Application of Interest Coverage Ratios in a Sample of Agricultural Firms in Italy

Iotti,

Manghi,

Bonazzi

2024

Energies

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The biogas sector in Europe and Italy is attracting growing investment, combining agricultural activity, the circular economy, and renewable energy production. Firms in the sector widely use debt capital and, for this reason, there is a need to evaluate the structure of investments, financing, and debt service capacity calculated by applying interest coverage ratios (ICRs). ICRs are widely used by banks in granting loans, and calculation of ICRs allows managers and policy makers to correctly evaluate firms’ performance in the sector. In this research, based on a sample of 160 observations, the structure of investments and sources of financing of firms in the biogas sector, operating in northern Italy, are analyzed. ICRs are calculated with different approaches to establish which ICRs provide the most reliable results in the application. The research analyzes the correlations and highlights significant differences between ICRs. The research highlights some important findings: (a) the NWC is negative in 109 out of 160 observations and, therefore, constitutes a source of financing in the majority of observations; (b) ICRs based on EBITDA and CF are above the threshold value of “1” in 143 and 145 observations, respectively, while ICRs based on EBIT, OCF, and UFCF are above the threshold value of “1” in 132, 133, and 122 observations, respectively. The research allows the conclusion that the ICRs based on EBITDA and CF tend to overestimate results; ICRs based on EBIT, OCF and UFCF are preferable, and can therefore be applied by managers, banks, and policy makers and be used as debt covenants. For the calculation of the repayment of the NFP, the research has highlighted that ICRs in which the cost of the debt is deducted from the numerator are preferable. The research can thus be usefully applied and expanded to other territories, or by considering a larger sample with the aim of inferring conclusions of general validity.

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Section: Methodsmentioning

confidence: 99%

Debt Sustainability Assessment in the Biogas Sector: Application of Interest Coverage Ratios in a Sample of Agricultural Firms in Italy

Iotti,

Manghi,

Bonazzi

2024

Energies

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“…Collectively, the results of Tables 7 and 8 indicate that our results are unlikely to be driven by observable differences in firm characteristics. Ma et al (2022) find that banks have their own style, such as preference for covenants. This suggests that contract design could reflect lenders' preference, which could potentially correlate with borrowers' labor-skill levels.…”

Section: Psm and Ebmentioning

confidence: 99%

“…Ma et al. (2022) find that banks have their own style, such as preference for covenants. This suggests that contract design could reflect lenders’ preference, which could potentially correlate with borrowers’ labor‐skill levels.…”

Section: Endogeneitymentioning

confidence: 99%

Skilled labor and bank loan contracting

Cheng

et al. 2023

Business Fin & Account

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This paper examines the credit risk implications of a firm's reliance on skilled labor and provides an empirical analysis of the effect of skilled labor on loan contracting outcomes. Using a sample of listed US firms from 1998 to 2017, we predict and find that banks charge higher interest rates to firms relying on high‐skill workers than low‐skill workers. This effect is stronger for firms with higher asset‐based operating leverage, higher probabilities of employee turnover and severer conflicts of interest between equity holders and debt holders. In addition, consistent with the idea that banks consider the specific costs and benefits associated with skilled labor, we show that a firm's reliance on skilled labor is positively (negatively) associated with the relative usage of capital (performance) covenants. Our results hold when applying different matching methods, fixed‐effect models or exogenous shocks from two quasi‐natural experiments. Overall, our study demonstrates the impact of skilled labor, an important labor‐force heterogeneity, on debt contract design and contributes to the understanding of the interaction between labor and capital, that is, the two primary inputs of a firm.

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“…Similarly, we add the average covenant strictness of all loans issued by the bank in the syndicated loan market over the sixmonth period prior to a loan issuance (Avg Strictness). We do this following prior studies which find that different lenders have their own preferences related to covenant strictness (Bushman et al 2021;Christensen et al 2021;Ma et al 2022).…”

Section: Separating the Effect Of Interest Spread From Loan Covenantsmentioning

confidence: 99%

Firm innovation and covenant tightness

Novoselov

Stice

et al. 2022

Rev Account Stud

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This study explores the association between firm innovation and loan covenant strictness. We find that lenders construct stricter contracts for firms filing more patents, consistent with lenders imposing more oversight on firms when they enter the commercialization stage after having demonstrated their inventiveness. Our results hold under propensity score matching and entropy balancing, and when exploiting the American Inventors Protection Act as a shock affecting unrelated banks’ access to patent filing information. The relationship we document is stronger when the lender has more expertise and for firms with higher default risk. We demonstrate that borrowers’ patent filings are associated with more future R&D and capital investment and with a higher likelihood of their acquiring firms in the industry of their patent filings. Our results are consistent with the theoretical prediction that lenders interpret patent filings as indicative of high inventive potential that requires stricter discipline and oversight by lenders in order to be converted into actual business success, and with them designing debt contract terms accordingly.

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What's my style? Supply‐side determinants of debt covenant inclusion

Cited by 11 publications

References 89 publications

Debt Sustainability Assessment in the Biogas Sector: Application of Interest Coverage Ratios in a Sample of Agricultural Firms in Italy

Debt Sustainability Assessment in the Biogas Sector: Application of Interest Coverage Ratios in a Sample of Agricultural Firms in Italy

Skilled labor and bank loan contracting

Firm innovation and covenant tightness

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