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Further Evidence on Consequences of Debt Covenant Violations
Author(s) -
Gao Yu,
Khan Mozaffar,
Tan Liang
Publication year - 2017
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12303
Subject(s) - shareholder , covenant , debt , information asymmetry , audit , business , volatility (finance) , monetary economics , empirical evidence , accounting , economics , financial economics , finance , corporate governance , law , political science , philosophy , epistemology
Abstract We present new evidence on debt covenant violation ( DCV ) consequences that have not previously been examined in the literature. In particular, we show that a DCV triggers significant information asymmetry and uncertainty on the part of shareholders and auditors as reflected in higher bid–ask spreads, return volatility, and audit fees. Further, these consequences occur even when lender‐imposed costs are relatively lower, consistent with the act of default itself triggering shareholder and auditor uncertainty. The results highlight costs to the firm of having bright‐line rules in contracts, and add to an understanding of the consequences of DCV s.