Association between restrictive covenants and accounting conservatism: evidence from US public debt

Amira Houaneb, Amira Houaneb, Rim Ben Hassen and Dorra Talbi

Journal of Financial Reporting and Accounting, 2021, vol. 21, issue 2, 344-369

Abstract: Purpose - The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of restrictive covenants of public debt may affect accounting conservatism. Design/methodology/approach - The sample is composed of non-financial firms and for each firm one debt contract is considered. The authors have used the Ball and Shivakumar (2005) models to test the relationships. All variables were retrieved from Mergent Fixed Investment Securities and COMPUSTAT Databases. Findings - The findings of this study show that the more the firm relies on bond covenants, the higher is the degree of conservatism. The authors found also that these firms also exhibited a widely significantly increased level of conservatism in the years following the issuance of debt. Research limitations/implications - The results should be interpreted with caution because the use of covenants does not take into consideration the tightness of their inclusion in the public debt contract. Originality/value - This paper makes a timely contribution to the debate of timely loss recognition by confirming the complementarity between the inclusion of restrictive covenants in the debt agreement and the accounting conservatism before and after the emission of public debt.

Keywords: Accounting conservatism; Restrictive covenants; Public debt contracts; Managerial opportunism; Wealth expropriation; Corporate governance; Accounting; Financial reporting (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrapp:jfra-11-2020-0320

DOI: 10.1108/JFRA-11-2020-0320

Access Statistics for this article

Journal of Financial Reporting and Accounting is currently edited by Prof. Aziz Jaafar and Prof Khaled Hussainey

More articles in Journal of Financial Reporting and Accounting from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().