Managerial Agency and Bond Covenants

Based on an analysis of the agency risk for bondholders from managerial entrenchment and fraud, we derive and test refutable hypotheses about the influence of managerial agency risk on bond covenants, using a comprehensive database of corporate bonds from the 1993-2007 period. Managerial entrenchmen...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2010-03, Vol.23 (3), p.1120-1148
Main Authors: Chava, Sudheer, Kumar, Praveen, Warga, Arthur
Format: Article
Language:English
Subjects:
Agency theory
Bond issues
Bond management
Bonds
Chief executive officers
Covenants
Dividends
Financial investments
Financial management
Fraud
Investment risk
Investment strategies
Risk assessment
Risk management
Shareholders
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Based on an analysis of the agency risk for bondholders from managerial entrenchment and fraud, we derive and test refutable hypotheses about the influence of managerial agency risk on bond covenants, using a comprehensive database of corporate bonds from the 1993-2007 period. Managerial entrenchment and the risk of managerial fraud significantly influence the use of covenants, in the direction predicted by the agencytheoretic framework. Our analysis highlights the varied effects of entrenchment on different types of agency risks faced by bondholders: Entrenched managers aggravate investment risk, but ameliorate risk from shareholder opportunism. Covenant use also responds efficiently to the quality of information available regarding the risk of managerial fraud.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhp072