Stock and Bond Returns, Insider Trading and Debt Covenant Violation Disclosures
Purdon, Kurt William
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Cite this item:
Purdon, K. W. (2016). Stock and Bond Returns, Insider Trading and Debt Covenant Violation Disclosures (Thesis, Master of Business). University of Otago. Retrieved from http://hdl.handle.net/10523/6692
Permanent link to OUR Archive version:
http://hdl.handle.net/10523/6692
Abstract:
This thesis investigates the effectiveness of debt covenant violations in applying disciplinary pressure onto management to protect bondholder wealth. By examining price behaviour for both bonds and stocks around debt covenant violation disclosures, I show that both parties earn positive abnormal returns in the 50 days following a covenant violation disclosure. The overall gains accrued by both parties for the entire event window depend on whether the violation is waived. Abnormal bond returns are relatively higher than abnormal stock returns when creditors are stricter in their enforcement of the non-waiver mechanism, with the reverse being true when violations are waived. I also show that firms with superior credit quality and profitability are more likely to receive a waiver.
I also examine if lagged bond prices can explain insider abnormal stock returns earned around covenant violations. I find no evidence of a bond price leading effect, instead showing that stocks lead bonds in the non-waiver sample. This supports the view that corporate insiders are able to use inside information gained during the covenant violation renegotiation process to earn abnormal returns in the stock market.
Date:
2016
Advisor:
Lont, David H.
Degree Name:
Master of Business
Degree Discipline:
Department of Accountancy & Finance
Publisher:
University of Otago
Keywords:
covenant; covenant violation; debt covenant; debt covenant violation; creditor control rights; waiver; non-waiver; insider trading
Research Type:
Thesis
Languages:
English
Collections
- Thesis - Masters [3375]
- Accountancy and Finance [263]