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E of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where future firm investments are efficient in some states, but also involve a transfer from the lender(s) to shareholders. While there is symmetric information regarding investment efficiency, managers are better informed about any potential transfer than the lender. The lender can learn this information, but at a cost. In this setting, we show that the simple adverse selection.
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Monotonically FAQ
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Debt covenants are designed to shield the lending institution against risk and, simultaneously, to help protect the borrower from loan default. They may outline both what a customer or member must do (known as a positive debt covenant) as well as actions that a borrower cannot make (negative debt covenants).
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Restrictive covenants are commonly used to prevent a bond issuer from issuing more debt until one or more series of bonds mature. The issuer may also be restricted from paying dividends above a certain amount to shareholders to minimize bondholders' default risk.
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The restrictions might specify that a certain level of sales or profits be generated or might limit the company's ability to take on other debt. If debt covenants are broken, often the loan becomes due immediately.
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There are essentially three types of loan covenants: positive loan covenants, negative loan covenants, and financial loan covenants.
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When a debt covenant is violated, depending on the severity, the lender can do several things: Demand penalty payment. Increase the predetermined interest rate. Increase the amount of collateral.
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Debt covenants are restrictions that lenders (creditors, debt holders, investors) put on lending agreements to limit the actions of the borrower (debtor). In other words, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders.
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4) Debt covenant: A debt covenant is an agreement utilized to protect creditor from the behavior of manager that deviates from the interests of the creditor [15]. The selection of accounting method is inseparable from the positive accounting theory, one of which is debt covenant hypothesis [16].
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In case a covenant is breached, the bank will probably block further credit to the debtor involved and will require the covenant to be cured, generally under the threat of triggering a default.
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