Debt covenant violations and corporate cost management

Yuqi Gu and Bo Ouyang

Advances in accounting, 2024, vol. 65, issue C

Abstract: In this study, we examine whether and how debt covenant violations are related to corporate cost management, an important business operating decision. Our findings suggest that firms significantly reduce slack operating resources after debt covenant violations. Our cross-sectional tests indicate that this reduction in cost stickiness is more pronounced when creditor monitoring is stronger, and when empire building is more severe. Our evidence adds to the literature on determinants of corporate cost management and sheds new light on how creditors influence firm behavior.

Keywords: Creditor control rights; Cost stickiness; Debt covenant violation (search for similar items in EconPapers)
JEL-codes: D24 G21 G30 G34 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:65:y:2024:i:c:s0882611024000270

DOI: 10.1016/j.adiac.2024.100756

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