The choice of maturity and additional covenants in debt contracts: A panel data approach |
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Authors: | Maria do Ros rio Correia |
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Affiliation: | aMiddlesex University Business School, The Burroughs, London NW4 4BT, United Kingdom |
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Abstract: | This paper provides a comprehensive analysis for the choice of contract terms in UK Eurobonds. Typically, the theory associates the choice of debt contract terms to firm and market characteristics, arguing that an adequate choice of these terms allows for the reduction of debt contracting costs. We use a panel data approach to examine the validity of extant predictions concerning the choice of maturity, call options, convertible options and protective covenants. Findings provide support to the agency prediction that debt contract terms function as alternative control mechanisms. Additionally, complementary role is found for the use of convertible and call options. Evidence that managers follow a maturity-matching rule, favour capital structure's flexibility in high growth scenarios and use protective covenants when firm's credibility is low corroborates further agency predictions. |
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Keywords: | Debt contract design Eurobonds Panel data estimation |
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