| Description |
This dissertation explores the determinants of the inclusion of total-asset net-worth covenants in debt contracts. Frankel, Seethamraju, and Zach (2008) find that the magnitude of intangible assets is positively associated with the inclusion of total-asset net-worth covenants. This finding raises the question of why such an association exists, given that intangible assets can be worthless at liquidation and generate cash flows with high uncertainty. To answer this question, I examine if the decision to include intangible assets in debt covenants is a function of three factors: borrowing firms' reliance on future cash flows related to intangible assets to make loan payments, lenders' industry expertise, and access to private information. I find that debt contracts are more likely to include total-asset net-worth covenants when borrowers have higher debt-to-tangible assets ratio. I also find that debt contracts are more likely to include total-asset net-worth covenants when lenders have expertise in the borrowing firm's industry or have a longer lending relationship with the borrowing firm. These findings help us to understand why intangible assets are employed in some debt covenants, and they shed new light on the information needs for intangible assets in debt contracting. |
