Liquidity Ratios in Bank Loan Covenants
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Authors
Sagner, James S.
Issue Date
2014-03-28
Type
Presentation
Language
en_US
Keywords
Faculty research day , Business
Alternative Title
Abstract
Bank loan covenants are restrictions that require stated levels of performance by borrowers, and are often measured by standard financial ratios. The research on loan covenants has assumed that these measures are useful, providing information to lenders as to the viability of borrowers. This analysis uses a sample of current ratios to suggest that such balance sheet ratios may have limited predictive value of impeding defaults, and proposes that total receipts-to-cash flow, a ratio comprised of data from both significant financial statements, provides superior forecasts of such outcomes. The research is based on U.S. experience during the recent credit crisis.