Debt Covenants and Investment: Response to Gulen, Jens, and Page (2020)

16 Pages Posted: 3 Aug 2020

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Date Written: July 7, 2020

Abstract

In a recent working paper, "An application of causal forest in corporate finance: How does financing affect investment?" Gulen, Jens, and Page, April 23 2020, (GJP) challenge the analysis and several conclusions of our paper, "How Does Financing Impact Investment? The Role of Debt Covenants," 2008, (CR). Specifically, GJP claim that our main results are not robust to a more recent machine learning estimation technique called "causal forest," and that covenant violations only affect investment in a small number of distressed firms. Here we show that these, and other claims made by GJP concerning our study, are incorrect. GJP's results are internally inconsistent, inconsistent with other published studies, and unreproducible. We also provide new evidence using the latest econometric techniques, including that suggested by GJP, and more recent data, all of which show the robustness of our original findings.

Keywords: Covenants, Investment

JEL Classification: G31, G21

Suggested Citation

Chava, Sudheer and Roberts, Michael R., Debt Covenants and Investment: Response to Gulen, Jens, and Page (2020) (July 7, 2020). Georgia Tech Scheller College of Business Research Paper No. 3645072, Available at SSRN: https://ssrn.com/abstract=3645072 or http://dx.doi.org/10.2139/ssrn.3645072

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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