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Financial ratio covenants and credit...

Demerjian, Peter R.

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Financial ratio covenants and credit risk.

Record Type:	Language materials, printed : Monograph/item
Title/Author:	Financial ratio covenants and credit risk./
Author:	Demerjian, Peter R.
Description:	189 p.
Notes:	Adviser: Patricia M. Dechow.
Contained By:	Dissertation Abstracts International68-08A.
Subject:	Business Administration, Accounting. -
Online resource:	http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=3276139
ISBN:	9780549174400

Financial ratio covenants and credit risk.
Demerjian, Peter R.

Financial ratio covenants and credit risk. - 189 p.

Adviser: Patricia M. Dechow.

Thesis (Ph.D.)--University of Michigan, 2007.

This dissertation examines factors affecting the inclusion and selection of financial ratio covenants in private debt agreements. Financial ratio covenants, where a borrower is required to maintain a threshold level of a specified financial ratio, are a common feature of debt contracts, being included in 87% of this study's sample of debt agreements. These covenants also play an important role in various streams of the accounting literature, including the debt covenant hypothesis and accounting conservatism. Despite their frequent use and importance to the literature, there is little evidence on why financial ratio covenants are included in debt contracts. This dissertation expands the literature by examining the role, inclusion, and selection of financial ratio covenants.

ISBN: 9780549174400Subjects--Topical Terms:

1020666
Business Administration, Accounting.

Financial ratio covenants and credit risk.
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020 $a 9780549174400
035 $a (UMI)AAI3276139
035 $a AAI3276139
040 $a UMI $c UMI
100 1 $a Demerjian, Peter R. $3 1280646
245 1 0 $a Financial ratio covenants and credit risk.
300 $a 189 p.
500 $a Adviser: Patricia M. Dechow.
500 $a Source: Dissertation Abstracts International, Volume: 68-08, Section: A, page: 3450.
502 $a Thesis (Ph.D.)--University of Michigan, 2007.
520 $a This dissertation examines factors affecting the inclusion and selection of financial ratio covenants in private debt agreements. Financial ratio covenants, where a borrower is required to maintain a threshold level of a specified financial ratio, are a common feature of debt contracts, being included in 87% of this study's sample of debt agreements. These covenants also play an important role in various streams of the accounting literature, including the debt covenant hypothesis and accounting conservatism. Despite their frequent use and importance to the literature, there is little evidence on why financial ratio covenants are included in debt contracts. This dissertation expands the literature by examining the role, inclusion, and selection of financial ratio covenants.
520 $a Following the moral hazard framework of Jensen and Meckling (1976), Myers (1977), and Smith and Warner (1979), I predict that financial ratio covenants limit the agency cost of debt. Specifically, the covenants limit investment and financing policy while allowing the borrower operating flexibility. This is in contrast to relatively costly negative covenants, which directly restrict actions by the borrower. The frequent use of financial ratio covenants over time suggest they limit agency costs in an efficient manner.
520 $a Using a large sample of borrowers with private debt agreements, I find a number of factors associated with the inclusion and selection of financial ratio covenants. Profitable borrowers with low volatility earnings are likely to have financial ratio covenants measured with income statement variables, such as EBITDA. In contrast, borrowers with poor performance and more volatile earnings are likely to have covenants measured with balance sheet ratios, such as net worth. These findings support the view that certain ratios are chosen to signal the underlying performance of the borrower. I also find that leverage covenants are more commonly included when debt is revolving, indicating leverage is used to control financing policy. Finally, current ratio covenants are relatively more likely to be included when the borrower has high levels of working capital, inventory, and receivables. This suggests that current ratio covenants are used to guarantee sufficient short-term liquidity when a borrower's operations are driven by current accounts.
590 $a School code: 0127.
650 4 $a Business Administration, Accounting. $3 1020666
650 4 $a Business Administration, Banking. $3 1018458
690 $a 0272
690 $a 0770
710 2 $a University of Michigan. $3 777416
773 0 $t Dissertation Abstracts International $g 68-08A.
790 $a 0127
790 1 0 $a Dechow, Patricia M., $e advisor
791 $a Ph.D.
792 $a 2007
856 4 0 $u http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=3276139