BOND COVENANTS, BOND ISSUE SIZE, AND CREDIT DEFAULT SPERED PREMIUMS

My dissertation contains two essays. It discusses the role of bond covenants in modern capital market and how they impact firms’ financial activities. Bond covenants are effective mechanism to mitigate the agency problems between bondholders and bond issuers. The design of bond covenants has extensive influence on firms’ financial activities. The first essay examines the effect of bond covenants on issue size. The agency problems can prevent bondholders from lending fund to issuers. The inclusion of bond covenants in indenture can provide bondholder with protection by restricting issuers’ activities, indicating the potential relationship between bond issue size and covenants. My findings suggest that restrictiveness of bond covenants is positively related with the issue size. Due to different agency problem, the design of bond covenant put emphasis on different restriction covenant. As a result, the essay observes that for investment grade (below grade) issuers issue size is positively related with the restrictiveness of financing (investment) covenants. Meanwhile due to the severe agency problem in low quality issuers, low rating firms have to include more covenants to raise the same amount of capital. The findings in the first essay indicate that firms can sacrifice their management by including restrictive covenants to raise more capital. The second essay examines the effect of bond covenants on likelihood of CDS issuance and the level of CDS spreads. Like bond covenants, CDS contracts are also effective mechanism to mitigate the agency problem between bondholders and bond issuers. The issuance of CDS occurs after firms include bond covenants, indicating that one of reasons for CDS is bondholders’ feeling of insecurity due to the unrestrictive bond covenants. My findings indicate that the restrictiveness of bond covenant can affect the likelihood of CDS issuance. CDS serves as complement to bond covenants for investment grade bondholder to mitigate the agency problem by providing bondholder with extra protection in the case of default. At the same time, bond covenant can also influence the level of CDS spreads by influencing the issuers’ default risk because actual use of bond covenants can lower the default risk. My findings suggest the level of CDS spread is negatively related with the restrictiveness of bond covenants. The findings in essay 2 not only provide possible reasons for CDS issuance and an important factor influencing the level of CDS spread but also build a link between literature of bond covenants and CDS.

The first essay examines the effect of bond covenants on issue size. The agency problems can prevent bondholders from lending fund to issuers. The inclusion of bond covenants in indenture can provide bondholder with protection by restricting issuers' activities, indicating the potential relationship between bond issue size and covenants. My findings suggest that restrictiveness of bond covenants is positively related with the issue size. Due to different agency problem, the design of bond covenant put emphasis on different restriction covenant. As a result, the essay observes that for investment grade (below grade) issuers issue size is positively related with the restrictiveness of financing (investment) covenants. Meanwhile due to the severe agency problem in low quality issuers, low rating firms have to include more covenants to raise the same amount of capital. The findings in the first essay indicate that firms can sacrifice their management by including restrictive covenants to raise more capital.
The second essay examines the effect of bond covenants on likelihood of CDS issuance and the level of CDS spreads. Like bond covenants, CDS contracts are also effective mechanism to mitigate the agency problem between bondholders and bond issuers. The issuance of CDS occurs after firms include bond covenants, indicating that one of reasons for CDS is bondholders' feeling of insecurity due to the unrestrictive bond covenants. My findings indicate that the restrictiveness of bond covenant can affect the likelihood of CDS issuance. CDS serves as complement to bond covenants for investment grade bondholder to mitigate the agency problem by providing bondholder with extra protection in the case of default. At the same time, bond covenant can also influence the level of CDS spreads by influencing the issuers' default risk because actual use of bond covenants can lower the default risk. My findings suggest the level of CDS spread is negatively related with the restrictiveness of bond covenants. The findings in essay 2 not only provide possible reasons for CDS issuance and an important factor influencing the level of CDS spread but also build a link between literature of bond covenants and CDS.
iii ACKNOWLEDGEMENTS I am grateful to parent who have been supporting all the time. They gave me all that I have today. I still remember when I was a kid how they encouraged me to make academic achievement although they received poor education due to the unfair social system. Their encouragements planted the dream seed of obtaining doctorate degree in my heart since then. It took the root inside my heart and now grows into a tree. They endured a lot of hardship bring up me. I owe a lot to them, and I love them. I thank Dr. Tong Yu for helping me go through the tedious program. At the same time, I want to express my heartfelt gratitude toward Dr. Shaw Chen who provided me with great opportunity of teaching at Simmons College in the last year of the program. Without its fund support, I cannot complete my program. I also want to thank Dr. Jefferey Jarrett who have been offering his kindness and support during the program. I owe a special note of gratitude toward Dr. Leonard Lardaro who gave critical support during the thesis defense.
I will never forget the caring and Prof. Eugene Lee showed to me when I had great sufferings in my life. It gave big courage to face with them. I will always remember how nice Prof. Clay V. Sink is to me. The little talks and lunch with him gave me a great deal of comfort when I was depressed.

INTRODUCTION
Corporate governance deals with the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer and Vishny, 1997). Bond covenant, an effective form of corporate governance, is a legally binding term agreed by both bond holder and bond issuer at the time of bond issuance. In their seminal paper on finance contract,  point out that covenants in debt contracts play a crucial role in reducing the agency problems between firms and creditors. Jensen and Meckling (1976) also imply that corporate bond covenants reduce the cost of debt. Based on their finding, extant research on bond covenants focus on how they will affect firms' investment policy, choice of leverage, agency cost and other relevant issues. The purposes of this essay attempt to identify covenant as a channel that may contribute to optimize the capital allocation among the bonds across different ratings.
When firms make decision to enter bond market to finance, one of the most important things that they are concerned probably is the amount of capital that they can raise. Due to the suboptimal incentive effects of debt (Jensen and Meckling (1976), Myers (1977), and ), bondholders tend to lend as little capital as possible unless the design of bond covenant can ensure their interests and the effective usage of capital. This gives rise to the potential relationship between issue size and restrictiveness of bond covenants. If firms include restrictive bond covenants in the bond indenture to exchange for more capital, it will provide new evidence for the conjecture that the bond covenants are effective mechanism to mitigate the agency problems between bond holders and bond issuers (Qi and Wald, 2008;Chava, Kumar and Warga, 2009;Aghion, Philipps and Pratrick, Bolton, 1992). Leland (2004) uses structure model to predict the default rate across the different ratings and concludes that bonds issued by low rating firms have higher rate to be faced with bankruptcy and financial distress. At the same time, Jensen and Meckling (1976) point out that agency problem become more severe when firms' financial situation is worse. Agency problem is more severe in low rating firms than high rating firms, indicating that low rating firms may have to include more covenants to raise the same amount of capital.
Examining the sample of private debt of public firms, Nini, Smith and Sufi (2009) point out that the restrictiveness of debt covenant varies across the bond with different ratings. The essay provides the consistent evidence by studying the public debt indentures. Below-investment grade firms are more likely to include investment restriction covenants than financing restriction covenants, while investment grade firms are more likely to include financing restriction covenants than investment restriction covenants. My findings further suggest that although firms do have the tendency to tolerate restrictive covenants to exchange for larger issue size, such issue size by firms across ratings are sensitive to different groups of restriction covenants. Below investment grade firms tend to use investment restriction covenants to exchange for more capital, while investment grade firms tend to use finance restriction covenants to exchange for more capital. Therefore, the essay finds that within the sample of below investment grade firms the amount of raised capital from the bond issuance has positive relationship with restrictiveness of investment covenants, while within investment grade firms there exists a positive relationship between the amount of raised capital from the bond issuance and the restrictiveness of financing covenants. The essay provides evidence for the endogeneity of bond covenants, the yield spread, and issue size.
My findings suggest that the yield spread of bonds seems to negatively impact the issue size of below investment grade firms but has no significant impact on the issue size of investment grade firms. At last, the essay finds that the expected EBITDA after the bond issuance (AIP) can positively influence the issue size for both the below investment grade issuers and the investment grade issuers. As the ratings drop, this positive relation becomes weaker too.
The difference of the covenant design among the bonds across ratings presents unique opportunity to examine the link between restrictiveness of covenants and ratings and other relevant issues. First, whether there exists the relation across the ratings between the restrictiveness of covenants and the amount of raised capital.
In other word, whether the firms have the tendency to sacrifice their freedom of management for raising more capital? The answer to the question concerns whether covenant is an effective channel through which firms can obtain the needed fund when they are short of capital. Second, if the answer to the first question is yes, then whether the amount of capital raised by firms across ratings is sensitive to the same group of bond covenants? The answer to this question will tell us whether lenders are concerned that the firms across ratings will violate the same group of bond covenants, providing the potential reason for the difference of the covenants design.
To answer the question posed above, however, requires a measure of the firm's overall covenant structure and a measure of the restrictiveness of specific group of bond covenants. Thus, in this essay, I construct a large panel data set that contains information on firms' bond covenant structure, leverage and other characteristics. I construct this database by merging data on public debt issue from the Fixed Investment Securities Database (FISD) with the Compustat database. The version of FISD that I employ in the essay reports the incidence of more than 50 different types of covenants in over 150,000 debt issues by nonfinancial firms from the 1960s through the first quarter of 2009. I use this data on individual debt issues through time, adjusting for sinking fund payments, calls, puts, conversions, and retirements at maturity. I then match this database to Compustat data, collecting information from Compustat on leverage, performance index, size and other firm characteristics.
The covenant information in FISD provides a unique opportunity to examine the incidence of covenants across a large sample of public debt issues. I find that overall the design of bond covenants become more restrictive as the ratings of issuers drop. The bonds issued by investment-grade firms tend to have less restrictive covenants than those issued by blow investment-grade firms. However, the design of bond covenant for firms across ratings put emphasis on restricting different behaviors. The paper provides evidence that lenders are more likely to restrict high quality firms' financing behavior than their investment behaviors.
Among the sample of investment grade firms, the index of financing restriction covenants is greater than that of investment restriction covenants. At the same time, lenders are more likely to restrict the low quality firms' investment behavior than their financing behavior. Among the sample of below investment grade firms, the index of investment restriction covenants is greater than that of financing restriction covenants.
The difference of bond covenants design suggests that firms across ratings may sacrifice different aspects of their management freedom to raise large amount of capital from bond issuance. My finding confirms it. Overall, the issue size is positively related with the restrictiveness of bond covenants. However, the issue size for the firms across different ratings is sensitive to different bond covenants.
The amount of capital raised by investment-grade firms in the bond issuance is positively related with restrictiveness of financing restriction covenants, suggesting that investment grade firms tend to sacrifice flexibility of financing for the large amount of capital. It is consistent with the bond covenants design among investment grade firms. Also, among investment grade firms such positive relationship become weaker as the ratings drop. Meanwhile, the bond issue size raised by below investment grade firms is positively related with restrictiveness of investment covenants but not sensitive to other covenants, suggesting that below investment grade firms are likely to sacrifice freedom of investment for the large amount of capital. It is consistent with the bond covenants design among below investment grade firms. Among below investment grade firms such positive relationship become weaker as the ratings drop.
The yield spread of bonds also has impact on the issue size, although such impact varies across issuers with different ratings. The level of yield spreads is associated with the default risk that can be influenced by the restrictiveness of bond covenant, generating endogeneity of bond covenants and yield spreads. The yield spread can directly determine the price of bond, a factor that can decide the quantity of supply and demand of bond, which can in turn affect the issue size. After controlling the edogeneity, I find that the yield spread is negatively related with the issue size in the sample of below investment-grade issuers, while such relationship is not significant in the sample of investment grade firms. This finding suggests that the influence of the yield spread on the issue size is only limited in the sample of below investment grade firms. Another interesting finding of this paper is that issue size is also associated with the expectation of the financial performance after the bond issuance. Both below investment grade firms and investment grade firms tend to have large issue size if they expect better financial performance after bond issuance (AIP). However, low rating firms will have smaller issue size with the same AIP than high rating firms.
The contribution of our research lies on two aspect. First, this paper is the first one to point out the positive relation between the amount of raised capital and restrictiveness of bond covenants varies across different ratings of issuers. Even though using the different sample,  find that there is a positive relation between the restrictiveness of bond covenants and the amount of capital raised from the bond issuance, consistent with our conclusion. However, their finding was based on quite small sample (less than 100 firms) and failed to point out which part of subsample is sensitive to which group of bond covenants.
At the same time, our research is a helpful supplement to the literature about the relation between issue size and firms' performance.  studies the private bank credit agreement and bond covenants. Their findings show that issues size can be predicted by the firms' financial performance after bond issuance. My paper points out this relation varies across ratings even after considering the effect of bond on the future financial performance.
The remainder of the essay is organized as follows. I review the literature and present testable predictions for the relation between the amount of raised capital, ratings and covenants in section II. Section III discusses the debt issue database used in our analysis and present descriptive statistics on the incidence of covenants in public issues. Section IV discusses the construction of our firm-year database and presents descriptive statistics for the variables used in our econometric analysis. Section V presents empirical results from the estimation of regression with firm characteristic and covenant protection as independent variables. Section VI concludes.

LITERATURE REVIEW
The earliest literature about bond covenant is  which investigated the effects of three specific provisions (safety covenants, subordination arrangements, and restrictions on the financing of interest and dividend payments) found in bond indentures. They found that these provisions do indeed increase the value of bonds, and that they may have a quite significant effect on the behavior of the firm's securities.
Existing literatures about covenant can be divided into two bodies. Since private credit agreements are the largest source of financing for corporations (Houston and James, 1996;Gomes and Philips, 2005;Sufi, 2009), one body of the literatures mainly focuses on private debt covenant. This body of literatures put much emphasis on either how the technical default (the violation of debt covenant) will influence firms' following financial policy or how design of the covenant affect firms' value. Tirole (2006) suggests that presence of covenants is motivated by their ability to mitigate agency problem (Jensen and Meckling (1976)). The covenant violations in private debt agreement identify a specific mechanism, the transfer of control rights, by which the misalignment of incentives can impact investment. Nini et al.
Their finding suggests that following violations firms experienced decline of acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover.  even identify debt covenants as a specific channel through which financing frictions impact corporate investment. The decline of capital investment follows a financial covenant violation. Whited (1992) and Hennessy (2004)   . Nini et al. (2009) point out that conflict of interest have a significant impact on firms' investment policy, and the capital expenditure in covenants cause a reduction in firms' investment. But firm experiences subsequent increase in their market value and operating performance after firms include new restriction in covenants. At last, Gomes and Philips (2005) and Sufi (2009) examine the covenants of bank loan agreements across different industry and find that the restrictiveness of covenants positively related to the size of the loan. At the same time, they also point out that including the investment expenditure restriction in the loan agreement help firm to raise more fund from banks, consistent with the prediction in Nini et al. (2009).
Our article can be categorized into the second body, that is, bond covenants or public debt covenants. The extant research on public debt covenants derive from  that regard the bond covenants as effective method to mitigate the agency problems between equity holders and bondholders. They think that bond covenants provide a tradeoff between the reduction in the agency problem and the costs of negotiating and enforcing covenants. As a result, one branch of research in this area focus on how the design of bond covenants balance the two sides of the tradeoff to maximize the value of the firm (Malitz, 1986;Nash, Netter and Poulsen, 2003;Qi and Wald, 2008;Chava, Kumar and Warga, 2009;Aghion, Philipps and Pratrick, Bolton, 1992). A new emerging line of research in this area is looking at the impact of covenants on bond spreads (Bradley and Roberts, 2004;and Reisel, 2007). Malitz (1986) and  identify that firm size and capital structure as the important factors that can influence the use of bond covenants.
Their studies show that small firms and firms with high leverage tend to include more restrictive covenants in their bond indenture, indicating that small firms and high leverage may worsen the agency problems in firms. Chava et al. (2004), Reisel (2004), andGoyal (2005) find that high growth firms are typically less likely to include restrictive covenants. Nash, Netter and Poulsen (2003) and Billett, King and Maucer (2007) also examine the effect of the growth option (investment opportunities) on the restrictiveness of debt covenants from different prospectives. Their findings suggest that covenants can mitigate the agency costs of debt for high growth firms and covenant protection is increasing in growth opportunities firms.  find that capital investment declines sharply following a financial covenant violations, a conclusion similar to private debt covenants. The above bond covenants literatures are based on the assumption that managements have the consistent interest with shareholders. Chava, Kumar and Warga (2009) study the effect of bond covenants on mitigating the agency problems in firms on the basis of managerial entrenchment. They find that entrenchment increases the likelihood of using investment covenants that restrict management's proclivity for undertaking economically inefficient "empire building" related investment. However, their findings also show that entrenchment is negatively related to the use of covenants on dividend payouts and acceptance of takeover offers.

HYPOTHESIS DEVELOPMENT
Current literatures show that bond covenants are effective mechanism to mitigate the agency problem between bondholders and bond issuers. The design of bond covenants can affect cost of debt financing, capital structure, investment policy, etc. Bondholders are not willing to lend capital to issuers unless the design of bond covenants can protect their interest. At the same time, the restrictiveness of bond covenants is associated with bond ratings. This indicates that there are potential relationship between the restrictiveness of bond covenants, issue size and bond ratings.
In this section, I will present the four testable hypothesis concerning restrictiveness of bond covenants, issue size and ratings. Firms across different ratings may be faced with different agency problems. As a result, the bondholders will worry that firms across different ratings will have different activities to encroach their interests. Therefore, I expect that the relationship between issue size and restrictiveness of bond covenants will vary with different ratings.
The extant literatures (Opler et al. (1999), , Faulkender and Wang (2006), Diamond (1991Diamond ( , 1993) point out that firms with low ratings are more likely to face with shortage of cash and fall into financial distress than firms with high ratings. Jensen and Meckling (1976), Chang and Wang (2009), DeAngelo et al (2002, Dittmar et al (2003), and Adam (2008) suggest that firms in bad financial situation have strong impulse to take more risky investment opportunity to earn extraordinary profit. So, bondholders are more concerned that below investment grade firms will invest risky projects when considering to lend them capital. As a result, in the covenant design bondholders will require more protection to restrict the below investment firms to take risky investment. This is consistent with the findings in Malitz (1986), Nash, J.Netter and A. Poulsen (2003), Nini et al.(2009 and Reisel Natalia (2004) that suggest bondholders are more likely to include investment restriction covenants when they think that issuers are likely to face with financial distress. Therefore, I expect that there is a positive relationship between issue size and restrictiveness of investment covenants among the bonds issued by below investment grade firms. H1: Everything else equal, there is positive relationship between issue size and restrictiveness of investment covenants among the bonds issued by below investment grade firms. Jensen and Meckling (1976) point out that agency problem become more severe when firms financial situation become worse. Since bond covenants are effective way to mitigate the agency problem, more severe agency problems means bondholder will ask for more restrictive covenants. As a result, I expect for the bonds issued by low rating firms with below investment grade will include more investment restrictive covenant to exchange for the same amount of capital than bonds issued by high rating firms. Therefore, the positive relationship mentioned in H1 will decrease as the ratings drop among the investment grade firms. H2: Among the below investment grade sample, firms have to include more investment restriction covenants to raise the same amount of capital as the ratings drop. Nini et al. (2009), Wasserfallen, W. and Wydler, D. (1988), Sorensen, E. (1979), DeAngelo et al (2002), and Dittmar et al (2003 suggest that bondholders are more concerned that high quality firms may utilize their rich resources to issue senior bond or make excessive payment to shareholders, which are activities related to firm's financing. These activities will also greatly do harm to bondholders' interest. At the same time, Adam (2008) points out bondholders are not worried too much about high quality firms to take high risky firm because they have more options and stable cash flow that will induce them to avoid the risky project. As a result, the issue size of bond by investment grade firm will be sensitive to financing restriction covenants rather than investment restriction covenants. Therefore, I expect a positive relation between issue size and restrictiveness of financing covenants among bonds issued by investment grade firms.
H3: There is positive relation between issue size and restrictiveness of financing covenants among bonds issued by investment grade firms.
The agency problem become severe as the firms' quality worsens among investment grade firms. As a result, I expect that the bond issued by the low rating firm with investment grade will include more investment restrictive covenant to exchange for the same amount of capital than high rating ones. Therefore, the positive relationship mentioned in H3 will decrease as the ratings drop among the investment grade firms.
H4: Among the investment grade sample, firms have to include more financing restriction covenants to raise the same amount of capital as the ratings drop.

Bond issue data
My bond data comes from Fixed Investment Securities Database (FISD). FISD keeps comprehensive information on over 150,000 public debt issues. The version of FISD that I use contains the bond issued through the first quarter of 2009 and that matured after 1989. I follow Chava etal.(2004), Reisel (2004),  and Zhang et al.(2013) to gather our sample of bond issues from FISD. I first exclude U.S. government bonds, foreign bonds, bonds denominated in foreign currency, and bonds issued by financial firms and finance subsidiaries in our sample. At the same time, I exclude 5,830 medium-term notes (MTNs) because FISD does not record covenant information for MTNs. As a result, I obtain an initial sample of 28,950 debt issues.
For this sample of 28,950 bond issues, I verify whether FISD recorded covenant information and whether FISD checked "subsequent data" when recording the features of the debt issue. The subsequent data flag in the FISD indicates whether the issue proceeded beyond the initial input phase, containing data from a prospectus, pricing supplement, or other more detailed document or source. Of the 28,950 bond issues, 15,744 have covenant information and 13,206 have no covenant information. In the latter group of issues, 9,613 have a "no" for checked subsequent data, while the rest of 3,593 have a "yes" for checked subsequent data. I exclude the 9,613 debt issues, and I include the 3,593 bond issues. As a result, I collect a sample of 19,337 (15,744+3,593) bond issues over 1960 to 2009. FISD also provides the bond ratings made by S&P, Moody's or Fitch firms. I match the ratings from Moody's and Fitch with those from S&P to make them comparable. So the ratings in our sample range from "AAA" to "C". I follow S&P to define bonds with rating among "AAA" to "BBB-" as investment grade, while bonds rated from "BB" to "C" as non-investment grade. prior to 1985. The reason that I at last leave these earlier debt issues in the sample is that many of them were still outstanding in the 1990s and therefore consist of part of our firm-year sample with covenant protection index. As shown in table I, the size of investment grade bonds is 1.5 times as big as the size of belowinvestment grade bonds.

Incidence of bond covenants
For each debt issue, the FISD reports the incidence of over 50 different bond holder protective and issuer restrictive covenants.  divide the bond covenants into three big categories: restriction of dividend payouts, restriction of financing and restriction of investment. Since dividend payouts is the cash outflow from financing activities in statement of cash flow, I further group the above three categories into two: restriction of financing and restriction of investment. Since typically there are multiple covenants for each type of restricted activity, according to  summarize the 50 different covenants into 15 major restriction, as given by the column of Table III. Among these fifteen major restrictions, the first nine ones are restriction of financing, while the rest of six ones are restriction of investment.
The first two categories restrict payouts to equity holders and others. An issue has a dividend restriction if there is a covenant limiting the dividend payments of the issuer or a subsidiary of the issuer. Typical subsidiary restrictions limit dividend payments to the parent, thereby preventing the parent from draining the subsidiary's asset. An issue has a share repurchase restriction if there is a covenant limiting the issuer's freedom to make payments (other than dividend payments) to shareholders and others. Note that this covenant would also restrict the issuers' ability to redeem subordinate debt. The next seven categories place restrictions on financing activities. A funded debt restriction prevents the issuer and subsidiary from issuing additional debt with a maturity of 1 year or longer. The next three covenants restrict the issuer from issuing additional subordinate, senior, and secured debt, respectively. Note that the secured debt covenant is referred to as a negative pledge, and typically specifies that the issuer cannot issue secured debt unless it secures the current issue on an equal basis. The category of covenants that I refer to as "total leverage tests" includes a variety of accounting-based restrictions on leverage, ranging from a requirement that the issuer maintain a specified minimum ration of earnings to fixed charges. A sale and leaseback covenant restricts the issuer and subsidiary from selling and then leasing back assets that provide security for the debt holder. This provision usually requires that the proceeds from the sale be used to retire debt or acquire substantially equivalent property. Finally, the stock issue restriction restricts the issuer and subsidiary from issuing additional common or preferred stock.
The next three categories are event-driven covenants related to firms' investment activity. An issue has a rating or net worth trigger if certain provisions are triggered when firm invests in certain projects prohibited in the agreement signed by the issuer. An issue has a below-investment provision if the firm invests in other firms whose ratings are below the firm's rating. Finally, the poison put provision gives the bondholders the right to demand redemption before maturity in case such events as restructure, leverage buyout and hostile takeover attempt.
The remaining three covenant categories place restrictions on investment policy.
An issue has an asset sale clause if the issuer and subsidiary are required to use the net proceeds from the sale of certain assets to redeem the issue at par or at a premium to par. Investment policy restrictions proscribe certain risky investment for the issuer and subsidiary. Finally, a merger restriction typically specifies that the surviving entity must assume the debt and abide by all of the covenants in the debt. Consistent with intuition, investment grade bonds (from AAA to BBB-) have more restrictive covenants than below-investment grade bonds (from BB to C).
Meanwhile, in investment grade bonds (from AAA to BBB-) high rating ones generally have more restrictive covenants than low rating bonds. This holds true for the below investment grade bonds (from BB to C). However observing carefully the distribution, I can find there is sudden jump from BBB to BBB-.
Almost all the 15 categories of the covenants except stock issue restriction increase to greater extent than before. Even the lowest firms don't have to include all the covenants in their indentures, demonstrating that they also have negotiation power in game of bond covenants design. This enable them to use bond covenants to exchange for the capital they need.

Construction of firm-year sample
Since our objective is to examine the relation between bond covenants and amount of raised capital across different ratings, I create a firm-year panel database that matches the FISD debt issue data to issuer financial data reported in Compustat. I begin by using the sample of 17,337 debt issues reported in Table I to create a firm-year history of debt issues. Starting in 1960, I trace individual debt issue to their issuing firms and then track the firms' portfolio of debt issues over time. I use historical redemption information reported in FISD to account for the changing composition of a firm's debt issue portfolio by adjusting the outstanding principal of debt issues for sinking fund payments, calls, puts, conversions, and retirement at maturity. I then match this historical debt issue database to Compustat data, requiring that firms have nomissing values for the dependent and independent variables discussed below. I start the firm-year sample in 1989 to allow sufficient time for a firm's debt to develop, and I stop the sample in 2008 because one of the independent variables uses data in the year after the year in which market-to-book ratio is measured. The final sample consists of 9,153 firm-year observations, representing 1,612 different firms over the period from 1989 to 2008.
Note that I construct the indices of covenant protection from FISD database, while I build the financial variables by intersecting the FISD with Compustat.
Because of this, it is important to check whether the intersected part of sample can represent the Compustat. If not, the financial variables cannot match with the indices of covenant protection. Actually, by checking total asset, total fix asset value, and total debt in each year, I find that the median ratios of sum of the three indices from intersected sample to those from the whole Compustat are 0.54, 0.61, 0.51, respectively. This suggests that the intersected sample can represent whole Compustat sample.

The indices of covenant protection
I follow  to build three indices of covenant protection: overall restriction index, investment restriction index and financing restriction index, respectively. I use the 15 categories of covenants presented in table III to create firm-year indices of overall restriction covenant. In this index, for a firm in a given sample year, I start by creating 15 covenant indicator variables that equal one if at least one debt instrument in its FISD debt issue portfolio has the given covenant and zero otherwise. I then sum the covenant indicator variables and divide by 15 to create an index that varies from zero (no covenant protection) to one (complete covenant protection). Note that this index makes the implicit assumption that a covenant in one debt issue provides protection for all of a firm's other debt that does not also have that covenant. This seems like a plausible assumption, since covenants typically restrict firm policies that have the potential to affect all debt holders. For example, covenants in one debt issue that restrict payouts to equity holders clearly protect all debt issues, as does an asset sale clause or some other restriction on a firm's investment policy. Additionally, note that this implies that studies that examine the determinants of covenants in individual debt issues actually underestimate covenant protection, since covenants in other debt issues of the firm can provide implicit protection. Finally, note that this index gives equal weight to the various covenant categories, an assumption that I will explicitly address in our empirical analysis by examining covenant index components. The process of building investment restriction and financing restriction index is similar to building overall restriction index. Instead of using 15 categories of covenant, I use the 9 (6) categories of financing (investment) covenants to build financing (investment) restriction index. Table IV presents the distribution of three indices across different ratings. From the whole sample, the firms almost have the same level of investment index as that of financing index. In general, investment-grade firms (from AAA to BBB-) tend to have less both investment restriction index and financing restriction index than below investment grade firms (below BB). As ratings drop, firms have to accept more both investment restriction index and financing restriction index.
Note a very interesting difference between investment-grade firms and below investment-grade firms. The investment grade firms, ranging from AAA to BBB-, are more likely to include the financing restriction covenants than investment restriction covenants. For each rating from AAA to BBB-, the average financing restriction index is greater than investment restriction index. This demonstrates that bondholders are more concerned that investment grade firms may overfinance to encroach their interest. At the same time, the below investment grade firms, ranging from BB to CCC and below, are more likely to include the investment restriction covenants. For each rating from BB to CCC and below the average investment restriction index is greater than financing restriction index.
This demonstrates that bondholders are more concerned that below-investment grade firms will invest in risky project to encroach their interest.
The findings are consistent with the extant literatures. The extant literatures (Opler et al. (1999), , Faulkender and Wang (2006), Diamond (1991Diamond ( , 1993) point out that firms with low ratings are more likely to face with shortage of cash and fall into financial distress than firms with high ratings. Jensen and Meckling (1976), Chang andWang (2009), DeAngelo et al (2002), Dittmar et al (2003), and Adam (2008) suggest that firms in bad financial situation have strong impulse to take more risky investment opportunity to earn extraordinary profit. So, bondholders are more concerned that below investment grade firms will invest risky projects when considering to lend them capital. As a result, in the covenant design bondholders will require more protection to restrict the below investment firms to take risky investment. Meanwhile, Nini et al. (2009), Wasserfallen, W. and Wydler, D. (1988), Sorensen, E. (1979), DeAngelo et al (2002), and Dittmar et al (2003 suggest that bondholders are more concerned that high quality firms may utilize their rich resources to issue senior bond or make excessive payment to shareholders, which are activities related to firm's financing. These activities will also greatly do harm to bondholders' interest. Adam (2008) points out bondholders are not worried too much about high quality firms to take high risky firm because they have more options and stable cash flow that will induce them to avoid the risky project. As a result, in the covenant design bondholders will require more protection to restrict the investment grade firms to encroach their interests.

The financial variables
After issuance performance (AIP): After issuance performance is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Average EBIT is the mathematical average EBITDA. The predicted EBITDA in each year equal to predicted EBITDA in previous year times 1 plus predicted growth rate. The predicted growth rate is average growth rate during the same period as maturity before the bond issuance. The EBITDA can eliminate the effect of capital structure on the performance.

Yield spreads:
The yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Since the interest rate of Treasury bond is risk-free return rate, this variable is always positive. High spread means high risk associated with the bond and can reduce the issue price of bond.

Leverage:
Leverage is the index to measure the ratio of book value of total debt to the market value of assets. The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.
Market-to-book ratio: I use market-to-book ratio to evaluate the firm's investment opportunities. Adam and Goyal (2003) point out that market-to-book ratio is the best proxy for growth opportunities. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the lefthanded side of balance sheet.

Maturity:
Maturity is defined in our article as the weighted maturity of the firm's total longterm debt. It is an effective index to measure how urgently the debt will push the firm to utilize its cash. I also recognize it as a good index to measure the firms' desire for cash.

Fixed asset:
Fixed asset is defined as the ratio of net value of fix asset to the total value of asset minus total depreciation. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash.
Volatility: Opler et al. (1999) to define volatility measure as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning.

Profitability:
Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset. Higher profitability can help firm to reduce the cost of bond issuance.

Descriptive statistics
Panel A of table V presents the descriptive statistics for the variables described above. I only present unscaled version of covenant indices to clearly show the size of bond covenants. The unscaled version of overall covenant index ranges from 0 to 15, while the unscaled version of investment (financing) restriction index ranges from 0 to 6 (9).
The mean covenants in the table show that high rating bond tend to have fewer covenants than low rating bond. The mean covenant index for the investment grade bond is 3.33, while the same index for the below investment grade bond is 8.23. From AAA to BBB-, the covenant index increases from 3.37 to 8.95 monotonically, while the covenant index changes from 7.36 to 12.12 monotonically from BB to C monotonically. The only exception happens between the BBB-grade bonds and BB grade bonds where the covenant index drops from 8.95 to 7.36. At the same time, the covenant index jumps dramatically from 6.53 to 8.91 from BBB to BBB-. The dramatic fluctuation shows that the bond covenants index has some more particular meaning for BBB-than bonds with other ratings.
The other variables in table IV seems to be in accordance with our intuition.
Bonds with high ratings tend to have lower leverage level than bond with low ratings. The leverage for investment grade bond is 0.31, while 0.51 below investment grade bond. High rating bonds tend to have smaller fraction of debt maturing within 3 years than low rating bonds because the mean maturity for investment grade bond is 0.16 comparing with 0.24 for below investment grade bond. The mean M/B ratio for investment grade bond is 1.78, while 0.86 for below investment grade bond, demonstrating that high rating firms have better investment opportunities than low rating firms. Firms with high ratings seem to have larger fraction of fixed asset than firms with low ratings. At the same time, volatility of firm with investment grade is 0.04, while 0.13 below investment grade firm, meaning that high rating firms have more stable earning. At last, the profitability of high rating firms is higher than that of low rating firms. In short, the data shows that high rating firms have better financial quality than low rating firms.

CHAPTER 6
Empirical Result

Endogeneity
The yield spread and issue size have close interconnectedness with each other.
Chen, Lesmond and Wei (2007) point out that the yield spread at bond issuance reflect the firm's default risk of the firm at that time. Since the price of bond will influence the quantity of bond demand and supply, the level of yield spreads will determine issue size. Actually, Duffee (1988), Amihud and Mendelson (1991),  believe that there is negative relationship between issue size and the yield spread, meaning that bond with high yield spreads will have small issue size.  also point out that bond liquidity will also be priced in the yield spread. Since the issue size is the measure of liquidity, issue size will also influence the yield spread. This will cause the endogeneity in my model. At the same time, bond covenant will affect the yield spread because restrictive bond covenant will influence the firm's default risk. Based on the above analysis, I build the following models. Size = β10 + α1*Yield + β11*Cov1 + β12*Cov2 + β13*M/B + β14*Lev + β15*Rating + β16*log(Asset) + β17*log(Asset) 2 + Ɛ1 (1) Yield = β20 + α2*Size + β21*Cov1 + β22*Cov2 + β23*Lev + β24*Rating + β25*Maturity + β13*EBIT/Asset + Ɛ2 Cov1 is the index of investment restriction covenants, while Cov2 is the index of financing restriction covenants. I perform preliminary Durbin-Wu-Hausman test to examine the endogeneity of the yield in the model 1. To do that, I first run the OLS regression in the following model: Yield = β30 + β31*Cov1 + β32*Cov2 + β33*Lev + β34*Rating + β35*Maturity + β36*EBIT/Asset + Ɛ3 It is similar to model (2)  because the coefficient on AIP is positive. This finding is consistent with intuition that better AIP will improve firms' long-term solvency, motivating firm to raise more fund. The coefficients on the AIP decrease as the rating drops. This indicates that low rating firms will have larger AIP to raise the same amount of capital than high rating firms.   Table I This table presents the distribution of bond issues from the Fixed Investment Securities Database (FISD). The sample doesn't contain U.S. government bonds, foreign bonds, bonds denominated in foreign currency, bonds issued by financial firms and finance subsidiaries, and medium-term notes. All bonds in the sample have the covenant and rating information in FISD. We define bonds rated from "AAA" to "BBB-" as investment grade bond, while those from "BB" to "CCC" and below investment grade.  Table II The table documents the various characteristics of bonds in our sample. The data comes from FISD and excludes U.S. government bonds, foreign bonds, bonds denominated in foreign currency, bonds issued by financial firms and finance subsidiaries, and mediumterm notes. The sample consists of public bonds issued in the period 1960-2009 by U.S. firms that have information on covenant and rating grades. The yield spread equals the offering yield of a corporate bond issue minus the yield of U. S Treasury bonds of similar maturity. The general meaning of our credit rating opinions is summarized below.

Year
('AAA'-Extremely strong capacity to meet financial commitments. 'AA'-Very strong capacity to meet financial commitments. 'A'-Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. 'BBB'-Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. 'BBB-'-Considered lowest investment grade by market participants. 'BB+'-Considered highest speculative grade by market participants. 'BB'-Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. 'B'-More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. 'CCC' and below-Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.)  .The sample of debt excludes U.S. government bonds, foreign bonds, bonds denominated in foreign currency, bonds issued by financial firms and financial subsidiaries, and medium-term notes. Bond grades come from S&P ratings. I match the grades from other credit organization and combine the observation. ('AAA'-Extremely strong capacity to meet financial commitments. 'AA'-Very strong capacity to meet financial commitments. 'A'-Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. 'BBB'-Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. 'BBB-'-Considered lowest investment grade by market participants. 'BB+'-Considered highest speculative grade by market participants. 'BB'-Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. 'B'-More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. 'CCC' and below-Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.)  Table IV This table presents both investment restriction index and financing restriction index of firms across different ratings. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants. Investment restriction index is the sum of the firm's 6 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' financing covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Bond grades come from S&P ratings. I match the grades from other credit organization and combine the observation. ('AAA'-Extremely strong capacity to meet financial commitments. 'AA'-Very strong capacity to meet financial commitments. 'A'-Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. 'BBB'-Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. 'BBB-'-Considered lowest investment grade by market participants. 'BB+'-Considered highest speculative grade by market participants. 'BB'-Less vulnerable in the nearterm but faces major ongoing uncertainties to adverse business, financial and economic conditions. 'B'-More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. 'CCC' and below-Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.)  Table V Descriptive Statistics of firms' financial variables. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants. Investment restriction index is the sum of the firm's 6 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' financing covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Bond grades come from S&P ratings. I match the grades from other credit organization and combine the observation.. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.  Table VI The table presents the result of Dubin-Wu-Hausman test. This test is to check the endogeneity between yield spread, issue size and yield spread. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Investment restriction index is the sum of the firm's 6 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' financing covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Bond grades come from S&P ratings. I match the grades from other credit organization and combine the observation. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). EBIT is the earning before interest and taxes. Asset is the market value of firms' total asset. The table presents results of three-equation system estimated by GMM. The results are based on the observation of firms across different rating. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants. Investment restriction index is the sum of the firm's 6 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' financing covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Bond grades come from S&P ratings. I match the grades from other credit organization and combine the observation.. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three  The results are based on the observation of investment grade firms across from AAA to BBB-. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three-  The results are based on the observation of AAA rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.   (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Table XI
The Joint Determinants of issue size, covenant and yield spread The table presents results of three-equation system estimated by GMM. The results are based on the observation of A rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three   (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.  The results are based on the observation of BBB-rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three The results are based on the observation of investment grade firms without BBB and BBB-_rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three The results are based on the observation of below investment grade firms across from BB to C and below. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three The results are based on the observation of BB rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three The results are based on the observation of B rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three The results are based on the observation of c and below c rating firms. After issuance performance (AIP) is the ratio of predicted average EBITDA to total value of asset within bond maturity period after bond issuance. Yield spread is the difference between return rate on bond and the interest rate of five year Treasury bond at the similar maturity, calculated by deducting the yield of Treasury bond from yield of bond. Leverage is the index to measure the ratio of book value of total debt to the market value of assets. (The book value of total debt is long-term debt plus debt in current liabilities. The market value of asset is the book value of assets minus the book value of equity plus the market value of equity that is equal to the price of stock times the outstanding shares.) Maturity is defined in our article as the weighted maturity of the firm's total long-term debt. Overall covenant index is the sum of the firm's 15 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD). A firm' investment covenant indicator variables are equal to one if any of its outstanding debt issues have a given covenants that restrict issuers' investment activities. Financing restriction index is the sum of the firm's 9 covenant indicator variables, which are constructed using debt issue data from the Fixed Investment Securities Database (FISD. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Log(Asset) is defined as natural log of market value of asset. The fraction of fixed asset is an important factor to affect the firm's ability to finance when it is faced with the shortage of cash. Volatility is the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Profitability is the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to total value of asset.

Three-Equation System
Three

Essay 2
Bond Covenants, Credit Default Swap and CDS Spreads Abstract Both bond covenants and credit default swap contract (CDS) are effective mechanism to mitigate the agency problems between bondholders and bond issuers. Issuance of CDS is probably due to insufficient protection from bond covenants, suggesting that CDS can serve as the complement to bond covenants to reduce agency problem. The paper finds among investment grade firms such conjecture holds. Investment grade firms tend to have negative relation between CDS issuance and the restrictiveness of financing covenants. The essay also finds that with the same ratings the CDS spreads are negatively related with restrictiveness of bond covenants. Since the restrictiveness of bond covenants is negatively related with default rate, the paper provides new evidence that CDS spreads are decided by default rate of the bonds.

Agency problem between bondholders and bond issuers is a big issue for firms
issuing bond. Restrictive bond covenant, an effective form of corporate governance, is a common element in bond contract to mitigate the agency problem between bondholders and bond issuers. It is a legally binding term agreed by both bond holder and bond issuer at the time of bond issuance. Smith and Warner (1979) point out that covenants in debt contracts play a crucial role in reducing the agency problems between firms and creditors. Jensen and Mackling (1976) also imply that corporate bond covenants reduce the cost of debt.
The market for credit derivatives has been prospering in the past decade from a total notional amount of $600 billion in 1999 to more than 25 trillion in 2014.
Credit default swap (CDS) is the most popular credit derivative (BBA, 2006). The contract of CDS is a bilateral agreement between a debt protection seller and a debt protection buyer. In a typical CDS transaction there are two counterparties: the buyer of protection and the seller of protection. The buyer of protection agrees to pay a periodic premium to the seller of protection. In return for the premium payment, the seller of the protection will compensate the buyer of protection in case a reference entity specified in the CDS contract experiences a default or similar "credit event".  and  suggest that CDS contract is an effective mechanism to reduce the agency problem by providing the bondholders with compensation in the case of default. It has been widely accepted that credit default swap (CDS) has lowered the cost of debt financing to firms by creating new hedge opportunity and information for investors ).  and Jensen and Mackling (1976)  are more likely to issue CDS contract. One concern about the above conjecture is that it may be due to the rating effect because generally high rating firms have loose covenants design than low rating firms. To eliminate this possibility, I test the potential negative relationship between CDS issuance and bond covenant among the investment grade samples across different ratings. In each ratings, the above conjecture holds.
The design of bond covenants will influence the likelihood of bond issuers' default by restricting firms' financing and investment activity. Mansi, Qi and Wald (2013)  Because the bond covenants occur before the issuance of CDS contract, the answer to this question indicates whether CDS is complement to bond covenants for firms to mitigate the agency problems. In other word, the driving force of CDS issuance could be the lack of sufficient protection due to design of bond covenants. Second, if the answer to the first question is yes, whether the restrictiveness of bond covenants can also affect the premium of the CDS contract.
Since the restrictiveness of bond covenants can lower the probability of default, the answer to this question will provide new evidence that the premium of CDS is determined by the likelihood of default.
To answer the question I posed, however, requires a measure of the firm's overall covenant structure and a measure of the restrictiveness of specific group of bond covenants. I follow the essay 1 to construct a large panel data set that contains information on firms' bond covenant structure, leverage and other characteristics.  . In the event of a covenant violation, the bond's legal documents specify cure periods and remedies available to bondholders.  divide the bond covenants into three big categories: restriction of dividend payouts, restriction of financing and restriction of investment. Since the dividend payouts resulted from firms' financing activity, this paper categorizes it into restriction of financing.
Restrictions on financing activities include covenants that limit the future issue of debt and sale-leaseback transactions, negative pledge covenants that limit the issue of secured debt, restrictions on sale-leaseback transactions, a way to raise capital by selling some specific asset to an entity that simultaneously leases the asset back to the organization for a fixed term and agreed-upon rate, additional debt covenants such as restrictions on issuance of additional debt unless the issuer achieves or maintains certain profitability levels, restrictions on incurring additional debt, with limits on absolute dollar amount of debt outstanding; restrictions on issuance of any debt with initial maturity of one year or longer.
Restrictions on investment activities include direct restriction on risky investments, restrictions on asset sales, restrictions on mergers-consolidations, and restriction on the consolidation or merger of the issuer with another entity, Specifically, the restriction on investment activities also include limitations on interest coverage or net worth following the transaction and typically requires that assets are sold at fair market value and limit the amount of non-cash proceeds from asset sales.

CDS contract
In its basic form a credit default swap (CDS) or in short a default swap contract is an OTC contract between two parties, in which one of the parties, the protection buyer, wishes to buy insurance against the possible default on a bond issued by a third party. The bond issuer is called the reference entity and the bond itself the reference obligation. The reference entity could be a corporation or a sovereign issuer. Based on the number of reference entity, the CDS can be divided into single-name CDS and basket CDS or (portfolio CDS). A single-name CDS is one that covers a debt security issued by a single reference entity, typically a corporation or a sovereign issuer. A basket CDS covers credit events by more than one reference entity.
The two parties agree to enter into a contract terminating at the time of default by the reference entity or at maturity, whichever comes first. In the event of default by the reference entity, a CDS can be settled with a cash settlement, in which case the buyer keeps the underlying, but is compensated by the seller for the loss incurred by the credit event, or with a physical settlement, in which case the buyer delivers the reference obligation to the seller and in return receives the full notional amount. The cash settlement amount would either be the difference between the notional and market value of the reference issue and a predetermined fraction of the notional amount. Furthermore, a CDS could include a delivery option similar to that found in treasury notes and bond futures contracts.
In exchange the protection buyer agrees to pay an annuity premium to the protection seller until the time of default by the reference entity or maturity of the contract, whichever comes first. If default occurs between premium payments, the protection buyer must pay to the protection seller the part of the premium that has accrued since the most recent CDS premium payment. At origination a standard CDS contract does not involve exchange of cash flows (ignoring dealer margins and transaction costs) and has therefore a market value of zero. Hence, the annuity premium, for which the market value of the CDS is zero, is determined at origination. This premium, which is typically quoted in basis points per $100 notional amount of the reference obligation, is called the market credit default swap spread or credit default swap premium.
Credit events that typically trigger a CDS include e.g. bankruptcy, failure to make a principle or interest payment, repudiation / moratorium, obligation acceleration, obligation default or restructuring.
The maturity of a CDS contract is negotiable and is not necessarily the same as the maturity of the reference entity. Maturities from a few months up to ten years or more are possible, however, most CDSs are quoted for a benchmark time-tomaturity of five years. Typical payment terms are quarterly or semi-annually. The risk between the protection buyer and protection seller is called the counterparty risk and has only little impact on the valuation and hedging of a CDS for most practical case. Hence, I do not deal with counterparty risk in this paper. Lando   et al. (2005) all find that CDS market plays a more important role in the price discovery process than the bond market. Norden and Weber (2006), in turn, find that CDS' spreads help explain subsequent monthly changes in aggregate loan spreads. Acharya and Johnson (2005) Tang and Yan (2010) examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, they find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. HYPOTHESIS DEVELOPMENT  and Jensen and Mackling (1976) point out that bond covenants are effective mechanism to reduce agency problem between bond holders and issuers by restricting issuers' activities. Hull, Predescu and White (2004) and Ashcraft and Johnson (2007),  and  believe that CDS contract can mitigate the agency problem in debt financing by providing bondholders with guarantee in the case of default. Because the issuance of CDS contract occur after bond issuance, it is reasonable to conjecture CDS is the result of insufficient protection from design of bond issuance. Unrestrictive covenants will provide bondholders with less protection. Since the restrictiveness of bond covenants vary with the credit ratings, high rating bonds tend to have less restrictive covenants than low rating bonds.
The above conjecture should be based on the bond with the same rating.
Agency problem presents different contents in firms across different qualities.
Low quality firms tend to put capital on risky investment projects to earn excessive profit. Malitz (1986), Nash, J.Netter and A. Poulsen (2003), Nini et al.(2009) and Reisel Natalia (2004 that suggest bondholders are more likely to include investment restriction covenants when they think that issuers are likely to face with financial distress. Due to the different agency problem, below investment grade bonds are more likely to include investment restriction covenant.
Therefore, I predict that among below investment grade firm sample, the likelihood of CDS issuance with the same rating bond as reference entity is negatively related with the restrictiveness of investment restriction covenants.
H1: Among below investment grade firms, the likelihood of CDS issuance with the same rating bond as reference entity is negatively related with the restrictiveness of investment restriction covenants.
On the other hand the suppliers of CDS contract have strong tendency to issue CDS with reference entity having small probability of default (Wang et al. (2013), ).  suggest that default rate is negatively related with the restrictiveness of bond covenant. Therefore, it is also possible that the likelihood of CDS issuance with the same rating bond as reference entity is positively related with the restrictiveness of investment restriction covenant.
Alternative H1: Among below investment grade firms, the likelihood of CDS issuance with the same rating bond as reference entity is positively related with the restrictiveness of investment restriction covenants. bondholders are not worried too much about high quality firms to take high risky firm because they have more options and stable cash flow that will induce them to avoid the risky project. Based on the same logic in the H1, I predict that among investment grade firm sample, the likelihood of CDS issuance with the same rating bond as reference entity is negatively related with the restrictiveness of financing restriction covenants.
H2: Among investment grade firms, the likelihood of CDS issuance with the same rating bond as reference entity is negatively related with the restrictiveness of financing restriction covenants.
With the same logic as the hypothesis one, the alternative to hypothesis 2 can be among investment grade firms, the likelihood of CDS issuance with the same rating bond as reference entity is positively related with the restrictiveness of financing restriction covenants.
Alternative H2: among investment grade firms, the likelihood of CDS issuance with the same rating bond as reference entity is positively related with the restrictiveness of financing restriction covenants.
CDS spread is the premium that bond holders pay in return for the compensation in case the bond issuers default.   If is viewed as a linear function of an explanatory variable (or of a linear combination of explanatory variables), then we express as follows: And the logistic function can now be written as: Note that is interpreted as the probability of the dependent variable equaling a "success" (issuance of CDS contract in this paper) or "case" (failure to issue CDS contract in this paper) rather than a failure or non-case. It's clear that the response variables are not identically distributed: differs from one data point to another, though they are independent given design matrix and shared with parameters .
The method to test the second and the third hypothesis are OLS regression model.
Since the CDS issuance is after the bond issuance, there is no endogenous behavior between restrictiveness of bond covenant and CDS spread, i.e., their cross-correlation is zero.

VARIABLES
In this section, I present all the variables used in the model.

Overall bond covenants index:
Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Please refer to the first essay to check about how to construct overall bond covenants index. The larger the index, the more restrictive the overall bond covenant is.

Investment restriction covenants index:
Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Please refer to the first essay to check how to construct investment restriction covenants index. The larger the index, the more restrictive the overall bond covenant is.

Financing restriction covenants index:
Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Please refer to the first essay to check how to construct financing restriction covenants index. The larger the index, the more restrictive the overall bond covenant is.

Firm Size
Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares.
Market-to-book ratio: I use market-to-book ratio to evaluate the firm's investment opportunities. Adam and Goyal (2003) point out that market-to-book ratio is the best proxy for growth opportunities. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the lefthanded side of balance sheet. Volatility: I follow Johnson (2003), Osler et al. (1999 to define volatility measure as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning.
Working capital: Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. If current assets are less than current liabilities, the firm has a working capital deficiency, also called a working capital deficit. Otherwise, the firm has a working capital surplus. In this paper, in order to consider the effect of firms' size, I use the ratio of difference between current assets and current liability to the market value of firms' asset. Profitability: Firm profitability, a measure of current performance, is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset.
Year dummy: Year dummy variable is a binary variable which is equal to one if the observation is in that year, otherwise zero.
Debt ratio: Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset. negative. This finding is consistent with intuition that more working capital means high liquidity of the firm and decrease the probability of bankruptcy. As a result, more working capital will lower the likelihood of bankruptcy.   respectively. In each of the tables from XXI to XXIII, the coefficient on investment restriction covenants is negative and statistically significant, demonstrating that with the same rating the CDS spread is negatively related with investment restriction covenants among below investment grade firms. Also the absolute number of the coefficient increase as rating drops, indicating that the effect of investment covenant on the CDS spread increase as ratings drop.

ROBUSTNESS CHECK
My conclusion about the effect of bond covenants on likelihood of CDS issuance and level of CDS spread are robust to the definition of the independent variables.
I use the following alternative definitions of variable to do the same above tests.
Alternative overall bond covenants index: Instead of using scaled bond covenants index, I use unscaled bond covenants index to measure the restrictiveness of overall bond covenants in the robust test.
Alternative financing covenants index: I use unscaled financing restriction covenants index to measure the restrictiveness of overall bond covenants in the robust test.
Alternative investment covenants index: I use unscaled financing restriction covenants index to measure the restrictiveness of overall bond covenants in the robust test.
Alternative working capital: I use current asset minus inventory and current liability as working capital in robust test Alternative profitability: I use EBIT instead of EBITDA to measure profitability in robust test.
Alternative volatility: I use the standard deviation of first difference in EBIT over the four years preceding bond issuance year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning to measure the stability of firms' financial performance.
Alternative debt ratio: I use the long term debt over by the difference between total asset and the sum of current liabilities plus book equity minus market equity  Since my concern is the effect of bond covenants on the CDS issuance and CDS   The results in the table are based on bond across different ratings from AAA to CCC and below. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the lefthanded side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the lefthanded side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of AAA rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of AA rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of A rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of BBB rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of BBB-rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of below grade bonds rating from BB to CCC and below. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  The results in the table are based on the observation of BB rating bonds. Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the lefthanded side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.  Overall bond covenants index is the variable that proxy the restrictiveness of all covenants in bond indenture that a firm is faced with. The overall bond covenants index ranges from 0 to 1. Investment restriction covenants index is the proxy that measures the restrictiveness of covenants restricting investment activities in the bond indenture that a firm is faced with. The investment restriction covenants index also ranges from 0 to 1. Financing restriction covenants index is the proxy that measures the restrictiveness of covenants restricting financing activities in the bond indenture that a firm is faced with. The financing restriction covenants index also ranges from 0 to 1. Firm size is a proxy for takeover deterrent and economies of scale. In this paper firm size is measured as natural log of total market assets. Total market asset is calculated as market value of equity plus book value of debt, while market value of equity is equal to market stock price multiplied by number of outstanding shares. Market-to-book ratio is equal to the market value of assets divided by the book value of assets. The market value of assets is discussed before. The book value of assets is the total value of assets shown at the bottom of the left-handed side of balance sheet. Volatility is defined as the standard deviation of first difference in earnings before interest, taxes, depreciation and amortization (EBITDA) over the four years preceding the sample year scaled by average assets for that period. Volatility is a good index to measure the stability of the firms earning. Working capital is the financial metric that measures operating liquidity available to a firm. Working capital is calculated as current assets minus current liability. Profitability is measured as the ratio of earnings before interest, taxes, depreciation, and amortization divided by total market value of asset. Year dummy is a binary variable which is equal to one if the observation is in that year, otherwise zero. Debt ratio is a proxy to measure the firm's leverage level and is measured as the ratio of total debt (both short term and long term debt) divided by market value of total asset.