Open AccessFirm Size, Insider Ownership, And Accounting-Based Debt Covenants
Author(s) -
Emmett H. Griner,
H. Fenwick Huss
Publication year - 2011
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.149
H-Index - 22
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v11i4.5841
Subject(s) - insider , business , creditor , debt , covenant , market liquidity , accounting , monetary economics , financial system , finance , economics , philosophy , theology , political science , law
The objective of this study is to investigate the separate and joint effects of firm size and insider ownership on the types of debt covenants required by creditors. An economic argument is developed to predict the types of covenants that will be required by creditors of firms of different sizes and with differing levels of insider ownership. The main finding is that creditors of small, high-insider-ownership firms demand liquidity covenants as protection against wealth transfers. An additional finding is that creditors of large firms demand covenants based on tangible assets, regardless of the level of insider ownership. The main conclusion is that the specific types of debt covenants required by creditors depend on creditors expectations concerning the effects of size and insider ownership on management actions.