Jensen and Meckling (1976) suggest that shareholders will engage in bonding activities and will write contracts that allow monitoring and creditor protection as long as the marginal benefits of each are greater than their marginal cost. Debt covenants are then in the interests of shareholders, even though they are costly. Smith and Warner’(1979) analysis of debt agreements indicate that debt covenants are designed to restrict management’s financing, dividend, and investment decisions in a manner that limits wealth transfer activities. The covenants that use accounting numbers are discussed next.