We investigate why covenant lite bond contracts which do not include any accounting maintenance covenants have recently risen in popularity. While much research has focused on the potential benefits of accounting for (bond) contracting purposes little research has focused upon the potential costs of including accounting statistics in contracts. In a setting in which standardization of contracts which exclude idiosyncratic accounting maintenance covenants enhance bond liquidity, we provide empirical support for theory that predicts that optimal bond contracts will be lite provided the likelihood of corporate default is sufficiently low. We suggest these results enhance our understanding of the limits of any proposed defence for the use of accounting being presented in terms of its usefulness in part being derived from its (bond) contracting role

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cove lite,covenants,bond turnovertrading volume,control rights

• Economics and Business - Social Sciences