Professor Karin Thorburn will present the paper 'Covenant removal in corporate bonds'
Abstract: Corporate bonds include action-limiting covenants that may prevent the firm from undertaking
valuable growth opportunities ex-post but are virtually impossible to negotiate. We study the
covenant defeasance option, which eectively mitigates this ineciency by allowing the rm to
remove the covenants. Our model predicts and our empirical analysis confirms that (1) financially
constrained firms with high uncertainty are more likely to include this option; (2) with the defeasance
option, issuers are willing to accept more action-limiting covenants ex ante; and (3) investors
require lower yield on non-callable bonds and higher yield on standard callable bonds that are