Abstract

http://ssrn.com/abstract=978711
 
 

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Financial Accounting Characteristics and Debt Covenants


Richard M. Frankel


Washington University in Saint Louis - Olin Business School

Lubomir P. Litov


University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center

April 2007


Abstract:     
We examine the relation between financial accounting characteristics and accounting-based debt covenants. We hypothesize that use of accounting-based covenants is more likely when asymmetric timeliness is higher and accounting discretion is reduced, because the covenants can more efficiently reduce agency costs in these circumstances. Overall, we find little association between the use of accounting-based debt covenants and three financial reporting characteristics (1) the magnitude of past discretionary accruals, (2) Basu's (1997) asymmetric timeliness measure, or (3) Ball and Shivakumar's (2006) asymmetric timeliness measure. We also are unable to find a consistently significant relation between these accounting characteristics and initial-covenant slack. Our results suggest that the relation between the effectiveness of accounting-based covenants and these characteristics is marginal.

Number of Pages in PDF File: 45

Keywords: asymmetric timeliness, discretionary accruals, bond covenants

JEL Classification: M41, G32

working papers series


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Date posted: April 9, 2007  

Suggested Citation

Frankel, Richard M. and Litov, Lubomir P., Financial Accounting Characteristics and Debt Covenants (April 2007). Available at SSRN: http://ssrn.com/abstract=978711 or http://dx.doi.org/10.2139/ssrn.978711

Contact Information

Richard M. Frankel (Contact Author)
Washington University in Saint Louis - Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Lubomir P. Litov
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-3794 (Phone)
University of Pennsylvania - Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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