Default Clauses in Debt Contracts

57 Pages Posted: 6 Jun 2015

See all articles by Ningzhong Li

Ningzhong Li

University of Texas at Dallas

Yun Lou

Singapore Management University - School of Accountancy

Florin P. Vasvari

London Business School

Date Written: June 4, 2015

Abstract

We examine the determinants of events of default clauses in syndicated loan and bond contracts, provisions that allow lenders to request the repayment of principal and to terminate lending commitments. We document significant variation in the use of default clauses and their restrictiveness within the same type of lending contract but also across loans and bonds. We find that default clauses in public bond contracts are less restrictive than those in syndicated loan contracts. We also document that two ex ante proxies for bankruptcy costs, the level of intangible assets and capitalized research and development expenditures at the time of debt contracting, are associated with less restrictive default clauses, especially in bond contracts. We conclude that bondholders attempt to mitigate the occurrence of inefficient defaults. Given their inability to coordinate with each other and their ownership of subordinated claims, bondholders incur higher default costs than bank lenders.

Keywords: events of default, default clauses, loan contracts, bond contracts, cross-default

JEL Classification: G21, G33, M41

Suggested Citation

Li, Ningzhong and Lou, Yun and Vasvari, Florin P., Default Clauses in Debt Contracts (June 4, 2015). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2614386

Ningzhong Li

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Yun Lou (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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