COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS

Michael U. Dothan

32 citations0/0 files storedThe Journal of Financial Research

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

Abstract

Abstract Creditors routinely impose on a borrowing firm a minimum interest coverage ratio that the firm has to maintain. I show that nonlinear costs of financial distress provide a possible explanation of why firms find it optimal to have an interest coverage ratio covenant in their debt indenture, even in the absence of information asymmetries or agency costs.

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2001The theory and practice of corporate finance: evidence from the field 1994Corporate Debt Value, Bond Covenants, and Optimal Capital Structure 1998Agency Costs, Risk Management, and Capital Structure 2001An EBIT‐Based Model of Dynamic Capital Structure 1993Does Default Risk in Coupons Affect the Valuation of Corporate Bonds?: A Contingent Claims Model 2001Default and Recovery Rates of Corporate Bond Issuers: 2000

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