Heterogeneity of covenants and corporate financial behaviour

Using a Python script to extract data from the SEC website, we acquired different types of debt covenants for a panel of US Compustat companies covering the period from 1995q1 to 2020q3. Our objective is to investigate how certain specific covenants affect firms’ financial behavior and debt dynamics. Specifically, we analyze the impact of maintenance capital covenants, which necessitate continual adherence to restrictions on capital structure; maintenance performance covenants, which could lead to the transfer of control rights to creditors; and incurrence limitation covenants, which activate predefined restrictions on the borrower’s actions once the covenant threshold is surpassed. These effects may vary and influence key parameters such as the speed of adjustment, free cash flow, and the substitutability of debt maturity, contingent upon the heterogeneous financial behaviors exhibited by firms.