ABSTRACT
This article investigates whether the concentration of stock ownership affects the presence and intensity of covenants in the debt contracts of companies listed on the B3 stock exchange in the 2007-2018 period. We also present an overview of the presence and breach of covenants by these firms. For this purpose, we manually analyzed more than 4,000 explanatory notes for the firms’ financial statements regarding loans and financing and then applied linear and nonlinear regression models. We found that greater ownership concentration is associated with higher likelihood of the presence of covenants, corroborating the role of the ownership structure as a substitute governance mechanism that allows for aligning interests and reduces the need for using covenants. The results are useful to managers, creditors, and shareholders, by showing which characteristics are determinants of the use of covenants, supporting management of factors that can reduce their occurrence, and bring greater flexibility to the corporate decision-making process, directly maximizing the value to shareholders.
KEYWORDS:
Covenants; covenant slack; ownership concentration; waivers; agency costs
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Notes: Net debt is equal to total gross debt minus cash and cash equivalents (cash and short-term financial investments); EBITDA is equal to earnings before interest, taxes, depreciation, and amortization; EBIT is equal to earnings before interest and taxes; DSCR denotes the debt service coverage ratio. Source: Own elaboration.
Notes. Ln means the natural logarithm; ROI denotes return on investments, equal to the sum of net profit plus financial expenses net of income tax divided by the sum of gross debt and net equity at market value; marginal tax rate of 34%; Gross Debt is equal to the sum of loans and financing, bonds and short- and long-term financial leasing obligations; and Market-to-book is equal to the market value of equity over the book value or equity. Source: Own elaboration.
Notes: During the years, we analyzed a fixed panel of 278 firms listed on the B3.Source: Research data.
Source: Research data.
Notes. The figure shows the number of observations of satisfied covenants (in light gray) and breached covenants (in dark gray) for each year. The number of observations with covenant limits disclosed is substantially lower than the number of firms that reported being subject to covenants. Source: Research data.