Ervin Black
Brigham Young University
Thomas A Carnes
University of Arkansas
Michael Mosebach
University of Arkansas, Fayetteville
Susan Moyer
Affiliation not specified
Abstract: Both debt covenants and federal monitoring restrict the discretion of banks, despite their different underlying motives. We examine whether banks substituted federal monitoring for covenants by investigating a sample of publicly held debt of over 60 banks between 1979 and 1984, a period when monitoring increased. We hypothesize that bank shareholders take advantage of the intersection between debt covenants and regulatory monitoring to reduce the agency costs inherent in the debtholder-shareholder relationship. We find a decrease in both the number of debt issues containing such covenants and in the total value of debt subject to such covenants between 1979 and 1984. We also examine 52 banks that issued new debt between 1979 and 1984 and find the use of such covenants decreased in the new debt. We find no such decrease in the use of covenants during the same period for a sample of manufacturing firms.
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