The value of restrictive covenants in the changing bond market dynamics before and after the ﬁnancial crisis Marc W. Simpson a, ⁎, Axel Grossmann b a The University of Toledo, 2801 W. Bancroft Street, Toledo, OH 43606, United States b Georgia Southern University, 1332 Southern Drive, Statesboro, GA 30458, United States article info abstract Article history: Received 17 February 2017 Received in revised form 24 July 2017 Accepted 4 August 2017 Available online 07 August 2017 We examine the pricing of restrictive covenants on bond issues before and after the ﬁnancial crisis. The existing literature in this area uses data from the pre-crisis period. While the results of our analysis using pre-crisis data are entirely consistent with existing literature, there are dramatic differences in the value of restrictive covenants between the two periods. Further, the differences between the coefﬁcients on the control variables document and elucidate the very different bond market dynamics before and after the crisis. Before the ﬁnancial crisis, we ﬁnd a statistically signiﬁcant cost reduction of around 50 basis points for the inclusion of negative pledges and restrictions on sale-and-leaseback activity. In the post-ﬁnancial crisis period, however, the beneﬁt of these types of covenants evaporates, becoming statistically insigniﬁcant. The beneﬁts, for investment grade ﬁrms, of restrictions on investment activities survives the ﬁnancial crisis; the price effect in the pre-crisis period is a statistically signiﬁcant 60 to 72 basis point (depending on model) reduction in yields, while in the post-crisis period it is a statistically signiﬁcant 51 to 55 basis point reduction in yields. For non-investment grade ﬁrms, we ﬁnd in the pre-crisis period that the price effect of restrictions on payouts and additional debt are insigniﬁcant. After the ﬁnancial crisis, however, these restrictions lead to a statistically signiﬁcant 141 to 150 basis point reduction in yields. © 2017 Published by Elsevier B.V. 1. Introduction That the ﬁnancial crisis of 2007–2009 presented a shock to ﬁnancial markets is indisputable. 1 In the midst of the crisis, corpo- rate borrowing and expenditures fell sharply (Kahle and Stulz, 2013). There is debate regarding the channels through which the crisis that began in the mortgage market affected disparate credit markets. Some argue that the crisis entailed a credit supply shock (Brunnermeier, 2009; Shleifer and Vishny, 2010; and Gorton, 2010), and others argue that a shock to credit demand drove the decline (Mian and Suﬁ, 2010). A third hypothesis centers on a balance sheet multiplier effect (Brunnermeier and Oehmke, 2013) in which the corporations' ability to borrow was hampered by their declining net worth and, hence, their ability to provide collateral for loans. Additionally, laws and regulations changed the business environment in which the corporations were operating. For example, the American Recovery and Reinvestment Act (ARRA) in 2009, added section 108(i) to the tax code allowing for the temporary Journal of Corporate Finance 46 (2017) 307–319 ⁎ Corresponding author. E-mail addresses: Marc.Simpson@UToledo.edu (M.W. Simpson), agrossmann@georgiasouthern.edu (A. Grossmann). 1 In this paper, the phrases “crisis,”“ﬁnancial crisis,” and “the ﬁnancial crisis” refer to the ﬁnancial crisis in the United States that occurred between 2007 and 2009. This crisis is called by various names in the academic literature and in the popular media, including the “Housing” or “Mortgage” crisis, the “Financial Crisis of 2008,” the “Global Financial Crisis,” or, even, the “Great Financial Crisis.” http://dx.doi.org/10.1016/j.jcorpﬁn.2017.08.002 0929-1199/© 2017 Published by Elsevier B.V. Contents lists available at ScienceDirect Journal of Corporate Finance journal homepage: www.elsevier.com/locate/jcorpfin