Debt Covenants and Accounting Conservatism

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 bondhold...

Full description

Saved in:
Bibliographic Details
Published inJournal of accounting research Vol. 48; no. 1; pp. 137 - 89
Main Author NIKOLAEV, VALERI V.
Format Journal Article
LanguageEnglish
Published Malden, USA Blackwell Publishing Inc 01.03.2010
Wiley Subscription Services
Wiley Blackwell
Blackwell Publishing Ltd
SeriesJournal of Accounting Research
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
Online AccessGet full text

Cover

More Information
Summary: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.
Bibliography:ark:/67375/WNG-ZLDZP25P-Z
ArticleID:JOAR359
istex:1DC747F13FE5174631B60EBDFC6BA71D87C21534
I am indebted to the co‐chairs of my dissertation committee, S.P. Kothari and Laurence van Lent. I thank Douglas Skinner (the editor) and the anonymous referee for constructive feedback that substantially improved the paper. I gratefully acknowledge comments from Ray Ball, Sudipta Basu, Jan Bouwens, Peter Easton, Douglas Hanna, Philip Joos, Christian Leuz, Maarten Pronk, Richard Sansing, and workshop participants at the annual American Accounting Association and European Accounting Association meetings, Emory University, MIT, Maastricht University, University of Antwerp, University of Chicago, University of Manchester, University of Michigan, University of North Carolina, and Tilburg University. This study was supported by a grant (R 46‐570) from the Netherlands Organization for Scientific Research (NWO).
ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0021-8456
1475-679X
DOI:10.1111/j.1475-679X.2009.00359.x