1. Trust and use of covenants
- Author
-
Qing Xia and Mengyi Cao
- Subjects
040101 forestry ,050208 finance ,Bond ,05 social sciences ,04 agricultural and veterinary sciences ,Monetary economics ,Affect (psychology) ,Covenant ,Variety (cybernetics) ,Issuer ,0502 economics and business ,0401 agriculture, forestry, and fisheries ,Business, Management and Accounting (miscellaneous) ,Substitution effect ,Business ,Security level ,Capital market ,Finance - Abstract
This paper provides new evidence on how cultural norms affect contract design in international transactions. By using a comprehensive dataset on Yankee bonds, we find that bond contracts include more covenants when the issuer comes from a country with a lower level of trust. This substitution effect between trust and contractual detail holds after controlling for a variety of controls in country, firm and security level. The findings suggest that foreign firms can write sophisticated contracts that overcome the shortage of trust and facilitate the access to global capital markets.
- Published
- 2021