What question did this study set out to answer?

To test the debt covenant hypothesis using a large sample of private corporate lending agreements and understand the economic role of debt covenants.

Large–Sample Evidence on the Debt Covenant Hypothesis

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Large sample tests demonstrate the economic impact of debt covenants in corporate lending, suggesting important implications for lenders.

To test the debt covenant hypothesis using a large sample of private corporate lending agreements and understand the economic role of debt covenants.
Analyzed data from Dealscan, focusing on private corporate lending agreements.
Constructed tests to evaluate the debt covenant hypothesis.
Measured covenant slack directly to assess the effectiveness of leverage as a proxy.
Found strong support for the debt covenant hypothesis, indicating tight covenant settings by lenders.
Technical violations of covenants occurred frequently but did not always correlate with financial distress.
Identified that leverage is a noisy proxy for the proximity to covenant limits.

Dichev et al. (2002) studied this question.

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