Financial frictions can be important determinants of macroeconomic outcomes. They can lead to sub-optimal credit allocation, create a smaller and less efficient economy (Berk, Stanton and Zechner 2010; Agrawal and Matsa 2013) and amplify macroeconomic shocks (Bernanke, Gertler and Gilchrist 1999; Jeenas 2019). A key cause of financial frictions is informational asymmetries and misalignment in incentives between lenders and borrowers (Stein 2003). This paper studies the macroeconomic consequences of debt covenants, a contractual device designed to address these information frictions in debt financing, using Australia ... (full story)