The Use of Debt Covenants Worldwide: Institutional Determinants and Implications on Financial Reporting

Abstract

This study investigates the use of debt covenants around the world. Based on a sample of 7,053 syndicated-loan borrowers from 23 countries, we find that debt covenants are more prevalent in countries with stronger law enforcement, more developed private credit market, and higher financial reporting quality, and that debt covenants are less prevalent in countries with more extensive creditor rights laws. In addition, we find that timely loss recognition increases with the use of debt covenants; and that this association is greater in countries with strong law enforcement. Overall, we are the first to comprehensively document the use of debt covenants across countries. Our findings shed light on how the use of accounting numbers in debt contracts responds to institutional arrangements that characterize contracting environments, and how it in turn shapes financial reporting practices across different legal regimes.