Heterogeneity of covenants and corporate financial behaviour

Bontempi, Maria Elena ; Bottazzi, Laura (2026) Heterogeneity of covenants and corporate financial behaviour. Bologna: Dipartimento di Scienze economiche, p. 53. DOI 10.6092/unibo/amsacta/9091. In: Quaderni - Working Paper DSE (1230). ISSN 2282-6483.
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Abstract

We view debt covenants as monitoring technologies that differ in intensity and allocation of control rights, thereby shaping corporate financial behaviour. We construct a novel dataset combining Compustat information with covenant data extracted from EDGAR filings through automated Python-based text analysis over 1995Q3–2020Q3. We classify covenants into maintenance capital covenants, maintenance performance covenants, and covenant-lite incurrence covenants, and firms according to their dominant financing behaviour, distinguishing leverage-adjustment-oriented firms from firms relying more heavily on financial flexibility through internal financing and debt maturity management. To account for the resulting heterogeneity, we estimate firm-level dynamic models and summarize the resulting parameters using a multivariate meta-analytic framework. We find that performance and limitation covenants are associated with greater financial flexibility, whereas capital covenants are associated with faster leverage adjustment. These findings suggest that covenant design shapes not only creditor protection but also firms’ dynamic capital structure choices.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsORCIDAffiliationROR
Bontempi, Maria Elena0000-0001-9633-3499Department of Economics, University of Bologna
Bottazzi, Laura0000-0002-4919-1763Department of Economics, University of Bologna
Keywords
Covenants, Language Models, Meta-analysis, Dynamic Panel, Data Models, Corporate Capital Structure
Subjects
ISSN
2282-6483
DOI
Deposit date
29 Jul 2026 13:44
Last modified
03 Sep 2026 12:28
URI

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