The design of debt contracts: Evidence of cost effective use of covenants from a large sample of small loans

Abstract

This paper investigates the use of covenants in debt contracts as well as the role played by accounting numbers in those contracts. More specifically, it provides evidence that covenants, and more importantly accounting based covenants, are used in a cost effective way in these contracts. It also provides a unique description of the types of covenants and accounting numbers which are used in a large sample of loan issued to small Canadian firms