Conservative financial reporting, debt covenants, and the agency costs of debt

Debt Covenants , Expected Default Costs , and the Implicit Cost of Financial Reporting Manipulation ∗

The transfer of control rights to lenders makes debt covenant violations costly to equityholders and managers, and provides managers with an incentive to manipulate covenant ratios and amounts. We find that the information contained in changes in the probability of covenant violations is priced by the stock market, incremental to changes in firm fundamentals. This relation is stronger when firm...

Financial Accounting Characteristics and Debt Covenants

We examine the relation between financial accounting characteristics and accountingbased debt covenants. We hypothesize that use of accounting-based covenants is more likely when asymmetric timeliness is higher and accounting discretion is reduced, because the covenants can more efficiently reduce agency costs in these circumstances. Overall, we find little association between the use of accoun...

Corporate Refinancing, Covenants, and the Agency Cost of Debt

How valuable are restrictive debt covenants in reducing the agency costs of debt? I answer this question by exploiting the revealed preference decision to refinance fixed-coupon debt, which weighs observable interest rate savings against the unobservable costs of a change in restrictive debt covenants induced by refinancing. Plausibly exogenous variation in this trade-off reveals that firms req...

Accounting Quality, Debt Covenants Design, and the Cost of Debt

We examine whether the presence of alternative debt covenant designs (threshold tightness, covenants frequency and covenant interdependence) reduces the adverse effect of poor accounting quality on debt cost in the private lending market. Our results indicate that when lenders face borrowing firms characterized by low accounting quality (hereafter, low quality borrowers), the lender tends to in...

Hedge Commitments and Agency Costs of Debt: Evidence from Interest Rate Protection Covenants and Accounting Conservatism