Abstract

We examine how contract term restrictions influence debt issuance behaviour and find that debt covenant violations impact firms’ debt maturity structure, costs, syndicate structure, collateralization and placement choice. Using the issuance of debt by non-financial firms between 1996 and 2008, we find that debt maturity decreases following a firm’s debt covenant violation while debt costs and covenant intensity increase. Debt seniority does not appear to have a strong relationship with covenant violations – firm size and firm quality have the biggest impact on seniority of debt issuance. We also show that the use of syndication and secured debt increases following a covenant violation. Our analysis demonstrates that the majority of the impact of the change in our dependent variables is observed following the first violation. Our analysis also includes the choice between public and private debt. We show that, following a covenant violation, firms are more likely to place their debt privately. Our findings help understand how the changes in the information and governance environment that follow a covenant violation affect future debt issuance behaviour.