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The Cost of Bond Covenant Restrictions on the Disposition of Assets
Author(s) -
Pashley Mary M.,
Krishnaswamy C.R.,
Gilbert Erika W.
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00096
Subject(s) - bond , covenant , business , cash flow , monetary economics , debt , stock (firearms) , economics , financial economics , finance , mechanical engineering , philosophy , theology , engineering
The cost of bond covenants restricting the dispositions of assets are examined in this study. Using an option pricing framework, it is shown that the cost of compliance could be high if restrictions are placed on the sale of common stock holdings. Similar results can be obtained by using a simple cash flow approach when calculating the effect on restrictions on the sale of depreciable assets. These costs somewhat offset the tax advantages of debt.