Debt covenant violations and risk shifting behavior

Purpose The study has three inter-related goals: first, to examine empirically the transfer of wealth from creditors to shareholders that occurs when firms default on debt covenants, second, to develop a framework for measuring the impact of overinvestment by firms in covenant default and, third, to provide an estimate of the cost to creditors of managerial risk-shifting. Design/methodology/approach The paper examines the relationship between …