Measuring the probability of financial covenant violation in private debt contracts

• Autores: Peter R. Demerjian, Edward L. Owens
• Localización: Journal of accounting and economics, ISSN 0165-4101, Vol. 61, Nº. 2-3, 2016, págs. 433-447
• Idioma: inglés
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• Resumen

  • Abstract We measure the probability that a borrower will violate financial covenants in private debt contracts. We analyze hand-coded data and specify standard covenant definitions using Compustat data that minimize measurement error for all individual Dealscan covenants. We use these definitions to create a measure of aggregate probability of violation, which can be used across all covenants in a loan or among covenant subsets of interest. We provide evidence that our aggregate probability measure is superior to alternatives used in prior literature.