Debt covenants and cross-sectional equity returns

Jean Helwege, Jing Zhi Huang, Yuan Wang

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


This paper investigates the impact of debt covenant protection on the cross section of equity returns with a firm-level covenant index and four subindices. We find that firms withweaker covenant protection (lower covenant index levels) earn significantly higher risk-adjusted equity returns than do those firms with greater covenant protection. These results are stronger for covenant indices that are related to investments, subsequent financing, and event risk. The difference between high and low covenant index stocks is more pronounced when agency problems between shareholders and debtholders are more severe, suggesting that the covenant effect arises from an inability to control shareholder risk taking.

Original languageEnglish (US)
Pages (from-to)1835-1854
Number of pages20
JournalManagement Science
Issue number6
StatePublished - Jun 2017

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research


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