 Debt covenant slack and ex-post conditional accounting conservatismBong Hwan Kim Accounting and Business Research, 2020, vol. 50, issue 2, 111-134 Abstract: This study examines how conditional accounting conservatism varies after debt contracts are executed (ex-post conditional conservatism) depending on the closeness to violations of debt covenants, the costs of covenant violations, and bank monitoring. I hypothesise that borrowers with lower debt-covenant slack have an incentive to avoid covenant violations and will have lower ex-post conditional conservatism levels than those with higher slack. I find that borrowers with both lower and higher slack increase their ex-post conditional conservatism, but that the magnitude of this increase in conservatism is positively associated with the level of covenant slack. Further, this positive relationship between the ex-post change in conditional conservatism and the debt-covenant slack is more pronounced when the costs of the debt-covenant breach are greater, and is less pronounced when lenders have stronger incentives to monitor borrowers. This study provides evidence that the ex-post change in conditional conservatism is affected by the costs of a covenant breach and bank monitoring. Date: 2020 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:acctbr:v:50:y:2020:i:2:p:111-134 Ordering information: This journal article can be ordered from DOI: 10.1080/00014788.2019.1663720 Access Statistics for this article Accounting and Business Research is currently edited by Vivien Beattie More articles in Accounting and Business Research from Taylor & Francis Journals |
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