The Real Effects of Debt Covenants: Evidence from Australia

Kim Nguyen
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Kim Nguyen: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: I study how the use and structure of debt covenants affect real business activity and pass-through of monetary policy using a newly constructed dataset of corporate debt covenants in Australia. I find that exposure to debt covenants disciplines firms' investment and staff expenses even in the absence of covenant breaches. In addition, covenants with interest coverage limits appear to amplify the transmission of monetary policy shocks while other types of covenants appear to mitigate transmission. As such, the shift from interest coverage limits to other types of covenants that appears to have occurred since the late 2000s may have lowered the responsiveness of investment to monetary policy, and in turn accounted for some of the surprising weakness in non-mining investment over the past decade.

Keywords: debt covenants; financing friction; investment; employment; monetary policy (search for similar items in EconPapers)
JEL-codes: E2 E5 G1 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2022-05

DOI: 10.47688/rdp2022-05

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