Title: Bank debt and financial flexibility

Authors: Nont Dhiensiri; Xiaohong (Sara) Wang

Addresses: College of Business and Management, Northeastern Illinois University, Chicago, IL 60625, USA ' College of Business and Management, Northeastern Illinois University, Chicago, IL 60625, USA

Abstract: We empirically examine the impact of the need for financial flexibility on firms' use of bank debt. Using a comprehensive sample from capital IQ (CIQ), we find that firms that are more likely to violate a covenant or incur higher costs from a covenant violation use less bank debt. Our results persist for both bank drawn revolving lines and term loans and for firms with or without access to the public bond market. These findings provide strong support to the survey results of Graham and Harvey (2001) that financial flexibility is an important factor in shaping corporate debt policy.

Keywords: bank debt; financial flexibility; covenant violation; debt structure; cash flow; growth opportunities; corporate debt policy.

DOI: 10.1504/IJMEF.2014.067718

International Journal of Monetary Economics and Finance, 2014 Vol.7 No.4, pp.249 - 265

Available online: 27 Feb 2015 *

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