Chapter 7: Loan covenants, relationship banking and management buy-outs in default: a comparative study of the UK and Holland
Page 153 7. Loan covenants, relationship banking and management buyouts in default: a comparative study of the UK and Holland David Citron, Ken Robbie, Mike Wright, Hans Bruining and Arthur Herst Introduction Jensen (1986) and Wruck (1990) argue that leveraged buyout firms achieve operating efficiencies due to the discipline and monitoring imposed by high leverage. Furthermore, if such firms become distressed, timely loan default should ensure that they are more likely to be rescued before their going concern value dissipates. Beneish and Press (1995a), however, find for nonLBOs in default that the cost of additional constraints imposed by lenders outweighs the benefits of increased monitoring. Furthermore, studies of firms breaching covenants have focused on those firms that have violated accountingbased covenants alone (see for example Beneish and Press, 1993, and Chen and Wei, 1993, on the costs of breach; DeFond and Jiambalvo, 1994, and Sweeney, 1994, on accounting responses to breaches). However, lenders often require a range of both accountingbased and nonaccountingbased covenants and it is possible that these interact as firms approach default. In this spirit Smith (1993) suggests that research into technical default needs to be integrated into a broader view of the lending process (p. 301). Similarly Singh (1993) makes a plea for introducing more institutional detail into studies of corporate restructuring, by which he means ‘a precise understanding of the actual mechanics of decision making’ (p. 164). This chapter focuses on the role of both accountingbased covenants and other...
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