Premium
Initial Technical Violations of Debt Covenants and Changes in Firm Risk
Author(s) -
Fargher Neil L.,
Wilkins Michael S.,
HolderWebb Lori M.
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00381
Subject(s) - systematic risk , debt , financial distress , leverage (statistics) , covenant , business , equity (law) , monetary economics , asset (computer security) , economics , financial system , actuarial science , finance , philosophy , theology , computer security , machine learning , computer science , political science , law
The purpose of this paper is to investigate whether initial technical debt covenant violations are associated with significant increases in the equity risk of violating firms. Our results indicate that first‐time violations are associated with significant increases in both systematic and unsystematic risk. The increase in systematic risk is attributable primarily to rising levels of financial leverage as opposed to changes in the underlying asset beta. We also find that the change in unsystematic risk experienced by first‐time debt covenant violators is a significant predictor of future exchange delisting, even after controlling for other factors typically associated with increasing financial distress.