Debt covenants, earnings-based borrowing constraints and macroeconomic dynamics

Abstract

Empirical evidences suggest that earnings-based borrowing constraints are more popular than physical asset-based borrowing constraints in the US economy, while their macroeconomic implications are not well studied. This paper first use micro level data in DealScan and Compustat to show the prevalence of earnings-based borrowing constraints. Then, I incorporate the two most frequently used earnings-based borrowing constraints into a macroeconomic model, quantitatively compare the response of macroeconomic variables to TFP shocks, financial shocks and monetary policy shocks when different borrowing constraint is imposed. The results suggest that the economies with different types of borrowing constraint response to TFP shocks and financial shocks in a very similar way, while the interest coverage constraint leads to a stronger response to monetary policy shock, and the interaction of two earning-based borrowing constraints can generate the constraint switching effects which tend to help amplify the response to monetary policy shocks.

Date of Award	2019
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology