[经管营销]Growth Opportunities and the Choice of Leverage_ Debt Maturity_ and Covenants.pdfVIP

THE JOURNAL OF FINANCE • VOL. LXII, NO. 2 • APRIL 2007 Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants MATTHEW T. BILLETT, TAO-HSIEN DOLLY KING, and DAVID C. MAUER∗ ABSTRACT 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 oppor- tunities, 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. KEY ELEMENTS OF CORPORATE FINANCIAL POLICY include the choice of debt level, the maturity structure of debt, and the types of restrictive covenants in the inden- tures. An important feature of these financial policy choices is that they are jointly determined as a function of firm characteristics and the contracting en- vironment. Previous studies examine the joint choice of leverage and maturity. Ours is the first empirical investigation that also accounts for the endogenous choice of covenant structure. We provide large-sample evidence that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that covenant protection significantly attenuates the neg- ative effect of growth opportunities on leverage. Our evidence suggests that firms use covenants to control stockholder–bondholder conflicts over the exer- cise of growth options, and that short-term debt and restrictive cove