When Is (Performance-Sensitive) Debt Optimal?

Existing theories of debt consider a single contractible performance measure ("output"). In reality, other performance signals are available. It may seem that debt is now suboptimal: if the signals are sufficiently positive, the manager should be paid even if output is low. This paper shows that debt remains optimal -- additional signals do not affect the form of the contract, but only the debt repayment, leading to performance-sensitive debt. However, some informative signals are unused, in contrast to the informativeness principle. We show which signals are valuable when the contract is driven by contracting constraints rather than the standard risk-incentives trade-off.