Bankruptcy abuse prevention has been criticized for increasing foreclosure rates, imposing negative impacts on housing markets, and aggravating the financial crisis. By contrast, this paper documents that bankruptcy abuse prevention reduces household debt overhang, a phenomenon harmful to home values and housing markets. Using a difference-in-differences analysis, we find that households in recourse states increased their home improvement and maintenance expenditures after the Bankruptcy Abuse Prevention and Consumer Protection Act, a period during which the households paid considerable attention to the downside risk of the housing market, and that the effects vary by home equity level. The results remain unchanged with alternative specifications and cannot be explained by credit changes, judicial and nonjudicial foreclosures, homestead exemption, house sales, or heterogeneous expectations. Last but not least, we use entropy balancing to eliminate the differences between the treatment and control groups and get similar results. 预防破产滥用的政策被认为推高止赎率、对住房市场造成负面影响以及加剧金融危机而饱受批评。与之相反，本文证明破产滥用预防能够缓解家庭债务积压（debt overhang）—— 而债务积压恰恰是一种损害房屋价值与住房市场的现象。采用双重差分（DID）分析，我们发现：在《破产滥用预防与消费者保护法案》（BAPCPA）实施后，**追索权州（recourse states）**的家庭增加了住房改善与维护支出；该时期家庭对住房市场的下行风险高度关注，且上述效应因房屋净值水平的不同而存在异质性。在多种替代设定下结果依然稳健，且不能被信贷变化、司法与非司法止赎、宅基地豁免、房屋销售或异质性预期所解释。最后，我们使用熵平衡（entropy balancing）方法消除处理组与控制组之间的差异，同样得到了一致的结果。

Debt covenants are pervasive in debt contracts. To prevent the dilution of existing debt, most creditors set covenants of a maximum debt-to-earnings ratio for borrowing firms. In this paper, we embed debt covenants into a workhorse real business cycle model with defaultable debt to study its macroeconomic implications. In our model, creditors penalize firms when debt covenants are violated. We show such a mechanism that covenants significantly reduce debt dilution and default over the business cycles. Furthermore, reduced debt dilution due to debt covenants also mitigates the debt overhang problem and thus boosts capital accumulation. Compared to counterfactual economies without covenants, the baseline economy with debt covenants experiences endogenous stabilization of macroeconomic shocks and higher levels of capital, output, and consumption.

We develop a model of a financial institution to study how shareholder—debt holder conflicts interact with prudential capital regulation and accounting measurement rules. Our analysis highlights the result that, for highly leveraged financial institutions—when prudential regulation play an important role—debt overhang and asset substitution inefficiencies work in opposing directions. We demonstrate that, relative to the “historical cost” regime in which assets and liabilities on an institution’s balance sheet are measured at their origination values, fair value could alleviate the inefficiencies arising from asset substitution, but exacerbate those arising from underinvestment due to debt overhang. The optimal choices of accounting regime and prudential solvency constraint balance the conflicts between shareholders and debt holders. Under fair value accounting, the optimal solvency constraint declines with the institution’s marginal cost of investment in project quality and the excess cost of equity capital relative to debt capital. Fair value accounting dominates historical cost accounting provided the solvency constraints in the respective regimes take their optimal values. If the solvency constraints are sub-optimally chosen, however, historical cost accounting could dominate fair value accounting.

This article uses a contingent-claims valuation method to compare debt financing, investment, and risk choices of a firm adopting the second-best strategy with those of a firm adopting the first-best strategy. The former bears the agency costs, as conjectured by Jensen and Meckling (1976) and Myers (1977), because it chooses suboptimal investment timing and risk levels, while the latter is able to avoid them. For plausible parameter values, we find that the second-best firm that takes on more debt will under-invest and bear excessive risk. We also find that the agency costs of debt are 15.8% of the first-best firm value, which is higher than that found by Leland (1998) and Mauer and Sarkar (2005).