Researcher ORCID Identifier
Date of Submission
Campus Only Senior Thesis
Bachelor of Arts
© 2022 Raj Bhutoria
EBITDA is a widely used metric of corporate profitability, used in the vast majority of US syndicated loan agreements; however, minimal research has occurred regarding variation within the contract-to-contract definition of EBITDA. Using machine learning techniques, we extract and analyze significant variation in the contractual definition of EBITDA and construct a ‘permissiveness’ index of the number of adjustments included in EBITDA definitions. We demonstrate that permissiveness is associated with riskier loans and larger firm size. Our findings also suggest permissiveness enhances the informativeness of riskier loan agreements by refining EBITDA to better reflect the borrower’s true financial condition; however, we find this is not a costless endeavor. We find that permissiveness is positively related to credit spreads, suggesting that higher permissiveness in EBITDA definitions may increase creditor’s risk by increasing the incidence of ‘false negative’ financial covenant violations.
Bhutoria, Raj, "Covenant Complexity in Credit Agreements: EBITDA Permissiveness and Credit Spread Outcomes" (2022). CMC Senior Theses. 2976.
This thesis is restricted to the Claremont Colleges current faculty, students, and staff.