Default clauses in debt contracts
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We examine the determinants of events of default clauses in syndicated loan and bond contracts, provisions that allow lenders to request the repayment of principal and to terminate lending commitments. We document significant variation in the use of default clauses and their restrictiveness within the same type of lending contract but also across loans and bonds. We find that default clauses in public bond contracts are less restrictive than those in syndicated loan contracts. We also document that two ex ante proxies for bankruptcy costs, the level of intangible assets and capitalized research and development expenditures at the time of debt contracting, are associated with less restrictive default clauses, especially in bond contracts. We conclude that bondholders attempt to mitigate the occurrence of inefficient defaults. Given their inability to coordinate with each other and their ownership of subordinated claims, bondholders incur higher default costs than bank lenders.
KeywordsEvents of default Default clauses Loan contracts Bond contracts Cross-default
JEL ClassificationG21 G33 M41
We thank an anonymous referee, Anne Beatty (discussant), Hans Christensen (discussant), Brandon Julio, Laurence van Lent, Stan Markov, Stephen Penman (editor), K. Ramesh, participants at the 2012 FARS Meetings, 2013 AAA Annual Meetings and seminar participants at Bocconi University, Erasmus University, ESSEC, HEC Paris, London Business School, Rice University, the University of New South Wales, and the University of Texas at Dallas for valuable comments and suggestions. We gratefully acknowledge the financial support of the AXA Research Fund and the London Business School RAMD Fund. We also thank Giulia Pizzini, Surabhi Rajagopal, and Sundipika Wahal for excellent research assistance.
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