An empirical investigation of the role of indenture provisions in determining bond ratings

Mai E. Iskandar-Datta, Douglas R. Emery

Research output: Contribution to journalArticlepeer-review

25 Scopus citations


This paper documents the occurrence of indenture provisions of newly issued bonds and the relevance of these provisions to a bond's rating. A chronicle of the various combinations of restrictive covenants reveals that four covenant combinations account for over 90% of the issues. The evidence also suggests that convertibility of an issue vitiates stockholder-bondholder conflict because these issues have few, if any, restrictive covenants. Also, the indenture provisions of low rated, subordinated issues appear to reflect a concern about the underinvestment problem while the opposite holds for high rated, nonsubordinated issues. The addition of indenture provisions to a bond rating model is shown to create a model superior to previous rating models. This finding highlights the complex nature of the corporate financial contracting process. Consistent with past evidence, Moody's ratings are predicted more accurately than S&P's ratings and split rated issues are predicted less accurately than commonly rated issues.

Original languageEnglish (US)
Pages (from-to)93-111
Number of pages19
JournalJournal of Banking and Finance
Issue number1
StatePublished - Jan 1994
Externally publishedYes


  • Agency costs
  • Bond ratings
  • Covenants
  • Indenture

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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