Does High Managerial Ability Help Borrower Avoid Debt Covenants Violation?

• In Event: Dialogue 2

Abstract

This study examines the impact of managerial ability on debt covenants design at the initiation of debt contracts and whether higher managerial ability reduces the likelihood of debt covenants violations. Analyses suggest that borrowers with superior managerial ability are less likely to have financial covenants and negative covenants. In addition, although those managers are positively related to lower costs of debt, statistics do not show a strong relationship between managerial ability and the possibility of debt covenants violations. This study implies that the efficiency of managers is also a determinant factor in debt covenants.

Author

• Yulin Zhu, Kent State University