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Working Paper
High-Yield Debt Covenants and Their Real Effects
High-yield debt, including leveraged loans, features incurrence financial covenants or "cov-lite" provisions. These covenants differ from traditional loans' maintenance covenants, as they preserve equity control rights but impose specific restrictions on the borrower after crossing the covenant threshold. Contrary to the prevailing belief that incurrence covenants offer limited protection for creditors, our research reveals a significant and sudden decline in investment upon triggering these covenants. This evidence highlights a novel propagation mechanism for economic shocks, wherein ...
Policy impact of unexpected Fed rate movements blurred by key information cues
Unexpected Federal Reserve monetary policy moves can profoundly affect market participants, investors and the economy. The impact of policy stems not only from its direct effects—the traditional focus for economists—but also from the new information revealed about the Fed’s economic outlook.
Working Paper
Uncertainty, Stock Prices and Debt Structure: Evidence from the U.S.-China Trade War
Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.