GAAP Goodwill and Debt Contracting Efficiency: Evidence from Net-Worth Covenants

Posted: 26 Oct 2007

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Chandra Seethamraju

Franklin Templeton Investments

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Multiple version iconThere are 2 versions of this paper

Abstract

We study the role of goodwill in promoting contracting efficiency and the effect of SFAS 141 and 142 on this role. We provide three main results. First, when a lending agreement contains some type of minimum-net-worth covenant, the probability of a tangible-net-worth covenant is decreasing in the borrower's goodwill. Second, the use of tangible-net-worth covenants has increased since the promulgation of SFAS 141 and 142. Finally, covenant slack is not significantly related to the use of tangible-net-worth covenants relative to net-worth covenants. These results suggest that contracting parties realize efficiency gains by permitting borrowers' actions to be restricted by the value of GAAP goodwill. However, the salutary effects of goodwill on contracting efficiency have been reduced due to recent changes in GAAP.

Keywords: Debt Covenants, Goodwill, Financial Accounting

JEL Classification: M41, M44, L14, G32

Suggested Citation

Frankel, Richard M. and Seethamraju, Chandrakanth and Zach, Tzachi, GAAP Goodwill and Debt Contracting Efficiency: Evidence from Net-Worth Covenants. Review of Accounting Studies, Vol. 13, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1024619

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

Chandrakanth Seethamraju

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,150
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information