HEC Research Papers Series,
HEC Paris

Abstract: This paper examines the effect of dispersion in firms' existing debt structures on the use of covenants in new loans. The authors find that more covenants are included when the existing debt is more dispersed. This result is consistent with the idea that dispersed debt structures harbor a greater potential for conflicts among creditors, so that new lenders demand additional covenants. Consistent with the notion that creditor conflicts matter most in case of default and are aggravated by information asymmetries, they find that the effect of debt structure dispersion is strongest for firms with high default risk and opaque accounting.

Keywords: Debt Dispersion; Loan Covenants; Debt Contract Terms; Debt Structure

JEL-codes: G32

45 pages, November 4, 2014

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