Events

Mr. Yang Cao
Ph.D. Candidate in Accounting
Carroll School of Management
Boston College

I examine the impact of covenant waiver disclosures by peer firms on the risk-taking behaviors of focal firms who share lenders. I posit that waiver disclosures by peer firms diminish the perceived uncertainty and expected costs associated with covenant violations, thereby diminishing the precautionary stance of management and encouraging increased risk-taking. Employing a natural language processing model to identify covenant violations and waiver disclosures in SEC filings, I conduct a determinant analysis which reveals that borrower characteristics (ROA, leverage, and PP&E) and loan features (lender’s share) correlate with the likelihood of receiving a waiver, albeit with limited explanatory power overall. By employing a difference-in-difference approach, I find that, following the peer waiver disclosures, focal firms amplify their risk-taking, as indicated by higher volatility of return and cash flow. Examining the underlying mechanisms, focal firms increase risk-taking by increasing leverage and product-development efforts. Overall, these findings illuminate a spillover effect where waiver disclosures by peer firms significantly influence managers’ capital structure and investment decisions.