Premium
Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants
Author(s) -
BILLETT MATTHEW T.,
KING TAOHSIEN DOLLY,
MAUER DAVID C.
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01221.x
Subject(s) - leverage (statistics) , debt , covenant , business , monetary economics , maturity (psychological) , finance , financial system , economics , mathematics , psychology , developmental psychology , philosophy , statistics , theology
We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.