Mitigating Agency Problems or Restricting Managerial Flexibility: The Effects of Bond Covenants on Operational Efficiency

Key Points

• Operational efficiency improves with strategic bond covenants, enhancing accountability and performance.
• Evidence demonstrates that firms with tighter financial constraints face lower managerial flexibility and operational outcomes.
• Analysis indicates firm performance varies with different agency problem mitigations and covenant structures.
• These findings suggest careful structuring of bond covenants may support operational goals while balancing managerial discretion.