Private Debt with Covenants - Slack, Discontinuities

This dissertation investigates the impact of private debt covenants on nonfinancial firms’
behaviour, with a focus on how creditors influence corporate decision-making. The first paper
explores how the threat of creditor intervention, stemming from potential covenant violations,
affects firm operational results and strategic decisions regarding investments, financial discipline,
and risk management. Using a novel measure of covenant slack, the study uses a
regression discontinuity design (RDD) with multiple cut-off points to examine the intensity of
covenant impact across firms segmented by size and reputation.
The second paper extends this analysis by addressing the interplay between multiple covenants
in loan agreements, a topic underexplored in the literature. By introducing a novel slack variable
based on a multivariate normal distribution, it investigates how the interaction of multiple
covenants, such as Net Worth, Leverage, and coverage ratios, shape firm behavior. Using a
multiple-cutoff RDD, the study identifies the most impactful covenant combinations of both
Capital and Performance types, and their role in influencing corporate decisions, even when
no violations occur.
Together, the two papers provide a comprehensive framework for understanding how individual
and multiple covenants act as a governance mechanism, influencing firm behavior
beyond the violation threshold. The findings offer significant implications for lenders in structuring
loan agreements, borrowers in negotiating terms, and researchers studying the role of
financial constraints in firm behavior and creditors in Corporate Governance.