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Debt Covenants and Accounting Conservatism

Journal of accounting research, 2010-03, Vol.48 (1), p.137-89 [Peer Reviewed Journal]

Copyright 2010 The Accounting Research Center at the University of Chicago Booth School of Business ;University of Chicago on behalf of the Accounting Research Center, 2009 ;2010 The Accounting Research Center at the University of Chicago Booth School of Business. ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679X.2009.00359.x ;CODEN: JACRBR

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Title:
Debt Covenants and Accounting Conservatism
Author: NIKOLAEV, VALERI V.
Subjects: Accounting ; Accounting systems ; Accounting theory ; Business accounting ; Conservatism ; Contracts ; Corporate debt ; Covenants ; Debt ; Debt contracts ; Decision making ; Economic losses ; Financial control ; Financial investments ; Financial management ; Investment strategies ; Liability ; Loss recognition ; Losses ; Public debt ; Stockholders ; Studies ; Subsidiary companies
Is Part Of: Journal of accounting research, 2010-03, Vol.48 (1), p.137-89
Description: Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers' abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if the accounting system recognizes economic losses in earnings in a timely fashion. Thus, the demand for timely loss recognition should increase with a contract's reliance on covenants. Consistent with this conjecture, I find evidence that reliance on covenants in public debt contracts is positively associated with the degree of timely loss recognition. I also find evidence that the presence of prior private debt mitigates this relationship.
Publisher: Malden, USA: Blackwell Publishing Inc
Language: English
Identifier: ISSN: 0021-8456
EISSN: 1475-679X
DOI: 10.1111/j.1475-679X.2009.00359.x
CODEN: JACRBR
Source: Alma/SFX Local Collection
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Debt Covenants and Accounting Conservatism

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