We investigate the implications of the recent trend for bond contracts to have no accounting covenants – so called cov-lite. Using contractual and transaction data for US high yield bonds issued between 2005 and 2014 we find evidence that the liquidity (yield) is significantly greater (lower) for cov-lite than to cov-strong bonds irrespective of the degree of accounting conservatism exhibited by the bond issuers. Our evidence is consistent with the demand for cov-liteness being driven by investors’ preference for simpler contracts with less coordination costs. This reduction in coordination costsenhances liquidity. We find that these bond market effects do not appear to be associated with an issuers’ level of accounting conservatism. Thus we suggest accounting conservatism is not required by cov-lite investors since the enhanced liquidity effects dominate any potential conservatism benefits. Our research highlights that there are several possible equilibria in which to evaluate the contracting value of conservative accounting as investors can rationally trade-off between control rights and liquidity.
The rise of covenant-lite bond contracting
Gietzmann, Miles;
2023
Abstract
We investigate the implications of the recent trend for bond contracts to have no accounting covenants – so called cov-lite. Using contractual and transaction data for US high yield bonds issued between 2005 and 2014 we find evidence that the liquidity (yield) is significantly greater (lower) for cov-lite than to cov-strong bonds irrespective of the degree of accounting conservatism exhibited by the bond issuers. Our evidence is consistent with the demand for cov-liteness being driven by investors’ preference for simpler contracts with less coordination costs. This reduction in coordination costsenhances liquidity. We find that these bond market effects do not appear to be associated with an issuers’ level of accounting conservatism. Thus we suggest accounting conservatism is not required by cov-lite investors since the enhanced liquidity effects dominate any potential conservatism benefits. Our research highlights that there are several possible equilibria in which to evaluate the contracting value of conservative accounting as investors can rationally trade-off between control rights and liquidity.File | Dimensione | Formato | |
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CovLiteDec20.pdf
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AcceptanceCovenantLitePaper.pdf
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