Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants
- 1 January 2009
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
For U.S. firms from 1988 to 2007, firms with stricter loan covenants had higher firm-level default recovery rates. Covenants were stricter, moreover, when set during downturns in the business cycle. This implies a negative dependence of recovery rates on lagged macroeconomic conditions. That is, bank loan contracts established in economic recessions have tight covenants, leading later to higher recovery rates. My empirical evidence suggests that private creditors have significant influence on firms' bankruptcy decisions through the channel of covenants in debt contracts.Keywords
This publication has 43 references indexed in Scilit:
- Forecasting Default with the Merton Distance to Default ModelThe Review of Financial Studies, 2008
- Does industry-wide distress affect defaulted firms? Evidence from creditor recoveriesJournal of Financial Economics, 2007
- Corporate Finance and the Monetary Transmission MechanismThe Review of Financial Studies, 2006
- The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications*The Journal of Business, 2005
- The Structure and Pricing of Corporate Debt CovenantsSSRN Electronic Journal, 2004
- Understanding the Role of Recovery in Default Risk Models: Empirical Comparisons and Implied Recovery RatesSSRN Electronic Journal, 2003
- Lending cyclesJournal of Econometrics, 1998
- Bond Covenants and Delegated MonitoringThe Journal of Finance, 1988
- Financial intermediary-coalitionsJournal of Economic Theory, 1986
- The Pricing of Options and Corporate LiabilitiesJournal of Political Economy, 1973