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COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS
Author(s) -
Dothan Michael
Publication year - 2006
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2006.00171.x
Subject(s) - financial distress , agency cost , creditor , information asymmetry , business , debt , agency (philosophy) , economics , monetary economics , finance , actuarial science , financial system , shareholder , corporate governance , philosophy , epistemology
Creditors routinely impose on a borrowing firm a minimum interest coverage ratio that the firm has to maintain. I show that nonlinear costs of financial distress provide a possible explanation of why firms find it optimal to have an interest coverage ratio covenant in their debt indenture, even in the absence of information asymmetries or agency costs.