Zhang, Zhipeng (2009): Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants.
Download (347Kb) | Preview
For U.S. firms from 1988 to 2007, firms with stricter loan covenants had higher firm-level default recovery rates. Covenants were stricter, moreover, when set during downturns in the business cycle. This implies a negative dependence of recovery rates on lagged macroeconomic conditions. That is, bank loan contracts established in economic recessions have tight covenants, leading later to higher recovery rates. My empirical evidence suggests that private creditors have significant influence on firms' bankruptcy decisions through the channel of covenants in debt contracts.
|Item Type:||MPRA Paper|
|Original Title:||Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants|
|English Title:||Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants|
|Keywords:||Recovery rate, Bankruptcy, Loan covenant, Creditor control, Business cycle|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Zhipeng Zhang|
|Date Deposited:||27. Sep 2009 16:13|
|Last Modified:||16. Feb 2013 05:53|
Acharya, V. V., S. T. Bharath, and A. Srinivasan, 2007, “Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries,” Journal of Financial Economics, 85(3), 787-821.
Altman, E. I., B. Brady, A. Resti, and A. Sironi, 2005, “The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications,” The Journal of Business, 78, 2203-2228.
Asea, P., and B. Blomberg, 1998, “Lending Cycles,” Journal of Econometrics, 83, 89-128.
Bakshi, G., D. Madan, and F. Zhang, 2006, “Understanding the role of recovery in default risk models: Empirical comparisons and implied recovery rates,” Working Paper, University of Maryland.
Begley, J., 1994, “Restrictive covenants included in public debt agreements: An empirical investigation,” Working paper, University of British Columbia.
Beneish, M. D., and E. Press, 1995, “The Resolution of Technical Default,” Accounting Review, 70, 337-353.
Berlin, M., and J. Loeys, 1988, “Bond covenants and delegated monitoring,” Journal of Finance, 43, 397-412.
Bharath, S. T., and T. Shumway, 2008, “Forecasting default with the Merton distance-to-default model,” Review of Financial Studies, forthcoming.
Billingsley, P., 1968, Convergence of Probability Measures. John Wiley and Sons, New York.
Black, F., and M. S. Scholes, 1973, “The pricing of options and corporate liabilities,” Journal of Political Economy, 81(3), 637-654.
Bolton, P., and X. Freixas, 2006, “Corporate Finance and the Monetary Transmission Mechanism,” Review of Financial Studies, 19(3), 829-870.
Boyd, J. H., and E. C. Prescott, 1986, “Financial intermediary-coalitions,” Journal of Economic Theory, 38, 211-232.
Bradley, M., and M. Roberts, 2004, “The structure and pricing of corporate debt covenants,” Working Paper, Duke University.
Bris, A., and I. Welch, 2006, “The Optimal Concentration of Creditors,” Journal of Finance, 60(5), 2193-2212.
Caballero, R. J., and A. Krishnamurthy, 2008, “Collective risk management in a flight to quality episode,” Journal of Finance, forthcoming.
Campbell, T. S., and W. A. Kracaw, 1977, “Information Production, Market Signaling, and the Theory of Financial Intermediation,” Journal of Finance, 35(4), 863-882.
Cantillo, M., and J. Wright, 2000, “How do firms choose their lenders? An empirical investigation,” Review of Financial Studies, 13(1), 155-189.
Carey, M., and M. Gordy, 2007, “The Bank as Grim Reaper: Debt Composition and Recoveries on Defaulted Debt,” Working Paper, Board of Governors of the Federal Reserve, Washington D.C.
Chava, S., and M. R. Roberts, 2008, “How does financing impact investment? The role of debt covenants,” Journal of Finance, 63, 2085-2121.
Chen, K. C. W., and K. C. J. Wei, 1993, “Creditors’ Decisions to Waive Violations of Accounting-Based Debt Covenants,” Accounting Review, 68, 218-232.
Dell’Ariccia, G., and R. Marquez, 2006, “Lending Booms and Lending Standards,” Journal of Finance, 61(5), 2511-2546.
Demiroglu, C., and C. M. James, 2007, “The Information Content of Bank Loan Covenants,” Working Paper, University of Florida.
Drucker, S., and M. Puri, 2008, “On loan sales, loan contracting, and lending relationships,” Review of Financial Studies, forthcoming.
Duffie, D., L. Saita, and K. Wang, 2007, “Multi-Period Corporate Default Prediction with Stochastic Covariates,” Journal of Financial Economics, 83(3), 635-665.
Düllmann, K., and M. Trapp, 2004, “Systematic risk in recovery rates An empirical analysis of US corporate credit exposures,” Working Paper, University of Mannheim.
Durrett, R., 2005, Probability: Theory and Examples. Brooks/Cole, Thomson Learning, Inc., Belmont, CA.
Frye, J., 2000a, “Collateral Damage Detected,” Federal Reserve Bank of Chicago, Working Paper, Emerging Issues Series, October.,
Frye, J., 2000b, “Depressing Recoveries,” Risk, 13(11), 108-111.
Furfine, C., 2001, “Bank portfolio allocation: The impact of capital requirements, regulatory monitoring, and economic conditions,” Journal of Financial Services Research, 20(1), 33-56.
Gambacorta, L., and P. E. Mistrulli, 2004, “Does bank capital affect lending behavior?,” Journal of Financial Intermediation, 13(4), 436-457.
Garleanu, N., and J. Zwiebel, 2008, “Design and Renegotiation of Debt Covenants,” Review of Financial Studies, forthcoming.
Gertner, R., and D. Scharfstein, 1991, “A Theory of Workouts and the Effects of Reorganization Law,” Journal of Finance, 46, 1189-1222.
Gorton, G. B., and P. He, 2008, “Bank Credit Cycles,” Review of Economic Studies, forthcoming.
Grenadier, S. R., and B. Hall, 1996, “Risk-based capital standards and the riskiness of bank portfolio: Credit and factor risk,” Regional Science and Urban Economics, 26(3-4), 433-464.
Guner, A. B., 2007, “Bank Lending Opportunities and Credit Standards,” Working paper, Barclays Global Investors, San Francisco.
Haubrich, J. G., and P. Wachtel, 1993, “Capital requirements and shifts in commercial bank portfolios,” Economic Review, Q III, 2-15.
Houston, J. F., and C. M. James, 1996, “Bank Information Monopolies and the Mix of Private and Public Debt Claims,” Journal of Finance, 51(5), 1863-89.
Hu, Y.-T., andW. Perraudin, 2002, “The dependence of recovery rates and defaults,” Working paper, Birkbeck College.
James, C., 1996, “Bank Debt Restructurings and the Composition of Exchange Offers in Financial Distress,” Journal of Finance, 51(2), 711-727.
Kahan, M., and B. Tuckman, 1993, “Do Bondholders Lose from Junk Bond Covenant Changes?,” Journal of Business, 66, 499-518.
Lang,W.W., and L. I. Nakamura, 1995, “ ‘Flight to quality’ in banking and economic activity,” Journal of Monetary Economics, 36, 145-164.
Leland, H. E., and D. H. Pyle, 1977, “Informational Asymmetries, Financial Structure, and Financial Intermediation,” Journal of Finance, 32, 371-387.
Lown, C. S., D. P. Morgan, and S. Rohatgi, 2000, “Listening to loan officers: The impact of commercial credit standards on lending and output,” Economic Policy Review - Federal Reserve Bank of New York, 6(2), 1-16.
Malitz, I., 1986, “On financial contracting: the determinants of bond covenants,” Financial Management, pp. 18-25.
Merton, R., 1974, “On the pricing of corporate debt: The risk structure of interest rates,” Journal of Finance, 29, 449-469.
Nash, C. R., J. M. Netter, and A. Poulsen, 2003, “Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants,” Journal of Corporate Finance, (9), 201-232.
Nini, G., D. C. Smith, and A. Sufi, 2009, “Creditor Control Rights and Firm Investment Policy,” Journal of Financial Economics, forthcoming.
O’Keefe, J., V. Olin, and C. A. Richardson, 2005, “Underwriting cycles in banking: Are bad loans really made in good times?,” Working paper, Federal Deposit Insurance Corporation.
Pykhtin, M., 2003, “Unexpected recovery risk,” Risk, 16(8), 74-78.
Rajan, R., and A. Winton, 1995, “Covenants and Collateral as Incentives to Monitor,” Journal of Finance, 50, 1113-46.
Rajan, R. G., 1994, “Why bank credit policies fluctuate: A theory and some evidence,” Quarterly Journal of Economics, 109, 399-441.
Ramakrishnan, R. T. S., and A. V. Thakor, 1984, “Information reliability and a theory of financial intermediation,” Review of Financial Economics, 51, 415-432.
Roberts, M. R., and A. Sufi, 2009a, “Control rights and capital structure: An empirical investigation,” Journal of Finance, forthcoming.
Roberts, M. R., and A. Sufi, 2009b, “Renegotiation of financial contracts: Evidence from private credit agreements,” Review of Financial Studies, forthcoming.
Roberts, M. R., and A. Sufi, 2009c, “Financial contracting: A survey of empirical Research and future directions,” Annual Review of Financial Economics, forthcoming.
Ruckes, M., 2004, “Bank Competition and Credit Standards,” Review of Financial Studies, 17, 1073-1102.
Shleifer, A., and R. Vishny, 1992, “Liquidation values and debt capacity: A market equilibrium approach,” Journal of Finance, 47, 1343-1366.
Smith, C. W., 1993, “A Perspective on Accounting-Based Debt Covenant Violations,” Accounting Review, 68, 289-303.
Smith, C. W., and J. B. Warner, 1979, “On financial contracting: An analysis of bond covenants,” Journal of Financial Economics, 7, 117-161.
Sufi, A., 2009, “Bank lines of credit in corporate finance: An empirical analysis,” Review of Financial Studies, 22, 1057-1088.
Van den Heuvel, S. J., 2002, “Does Bank Capital Matter for Monetary Transmission?,” Economic Policy Review, 8(1), 259-265.
Van den Heuvel, S. J., 2007, “The Bank Capital Channel of Monetary Policy,” Working paper, University of Pennsylvania.
Weinberg, J. A., 1995, “Cycles in Lending Standards,” Economic Quarterly, 81(3), 1-18.
Wooldridge, J. M., 2002, Econometric Analysis of Cross Section and Panel Data. MIT Press Cambridge, MA.