Covenant Indexes and stock returns

What is it about?

This paper investigates the impact of debt covenant protection on the cross section of stock returns with a firm-level covenant index and four subindices. We find that firms with weaker covenant protection (lower covenant index levels) earn significantly higher risk-adjusted stock returns than do those firms with greater covenant protection.

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Why is it important?

The paper provides evidence that stock returns are related to levels of debt covenant protection.