[This article examines the determinants of financial covenant thresholds in bank loan agreements and information conveyed through the selection of tight financial covenants. We find that riskier firms and firms with fewer investment opportunities select tighter financial covenants. We also find that selection of tight covenants is associated with improvements in the covenant variable and declines in investment spending and net debt issuance. We observe these changes also for borrowers that do not breach their covenants, suggesting that they are not simply the result of creditor influence conditional on a technical default. Furthermore, we find that violations of tightly set covenants have significantly less of an impact on the borrower's investment spending and net debt issuance than violations of loosely set covenants. Overall, our results suggest that the selection of tight covenants conveys information concerning future changes in covenant variables, investment and financial policies, and the outcome of covenant violations.]

This paper analyzes how access to deposit insurance affects the common stock returns of financial institutions during periods of financial distress. During periods of distress the definition of insolvency used by insuring agencies may be modified to avoid a substantial number of bank failures. These modifications can increase the value of future deposit guarantees and affect the behavior of stock returns of banks and S&Ls. This hypothesis is examined using S&L data for the 1976 through 1983 period. Modification of insolvency rules applied to S&Ls appears to have reduced significantly the co-movement of S&L stock returns with S&L portfolio holdings.

Using hand-collected data on corporate bond and stock offerings, we identify the impact of government debt on corporate financing during World War I. The early twentieth century provides a unique opportunity to identify the impact of government debt on private financing because during this period (1) firms announced the amount they wanted to raise before each security offering and (2) the Treasury issued debt in discrete intervals. We identify the impact of Treasury issues by comparing differences in the amount firms offered to the amount they actually raised when the Treasury was borrowing to when the Treasury was not in the market. We find that long-term government bond offerings negatively affect both amount of long-term corporate bonds and dividend paying stocks issued. In contrast, we find no effect on short-term debt issue. Our findings suggest that investors view stable dividend paying stocks a close substitute for relatively safe long-term bonds.

This paper examines asset sales by financially distressed firms. Contrary to the results for healthy firms, we find significantly lower returns to shareholders when asset sales proceeds are used to repay debt than when sales proceeds are retained by the firm. We find that asset sales proceeds are more likely to be paid out to creditors, as opposed to being retained by the firm, the larger the proportion of short-term senior bank debt in the firm's capital structure and the poorer the selling firm's investment opportunities. Our results suggest that creditors significantly influence the liquidation decisions of financially distressed firms.

In this paper the authors examine the effect of competition in the market for bank acquisitions on the acquirers' stock returns. Bank acquisitions are examined because federal and state regulations greatly facilitate the identification of potential bidders and alter native targets in an acquisition. They find that the gain to acquirers is positively related to the number of alternative target firms available and negatively related to the number of other potential bidders. These results provide some insights into the sources of gains from bank acquisitions.

A significant proportion of the debt issued by investment‐grade firms has maturities greater than 20 years. In this paper we provide evidence that gap‐filling behavior is an important determinant of these very long‐term issues. Using data on individual corporate debt issues between 1987 and 2009, we find that gap‐filling behavior is more prominent in the very long end of the maturity spectrum where the required risk capital makes arbitrage costly. In addition, changes in the supply of long‐term government bonds affect not just the choice of maturity but also the overall level of corporate borrowing.