The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Losing Control? The Two‐Decade Decline in Loan Covenant Violations
Published: 12/14/2025 | DOI: 10.1111/jofi.70005
THOMAS P. GRIFFIN, GREG NINI, DAVID C. SMITH
The annual proportion of U.S. public firms that reported a financial covenant violation fell roughly 70% between 1997 and 2019. To understand this trend, we develop an estimable model of covenant design that depends on the ability to differentiate between distressed and nondistressed borrowers and the relative costs associated with screening incorrectly. We find that the drop in violations is best explained by an increased willingness to forgo early detection of distressed borrowers in exchange for fewer inconsequential violations, which we attribute largely to a shift in the composition of public borrowers and partly to heightened investor sentiment during the 2010s.