The Use of Debt Covenants Worldwide: Institutional Determinants and Implications on Financial Reporting

59 Pages Posted: 30 Oct 2009 Last revised: 26 Aug 2011

See all articles by Hyun A. Hong

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Jieying Zhang

The University of Texas at Dallas

Date Written: August 25, 2011

Abstract

This study investigates the use of debt covenants around the world. Based on a sample of 7,053 syndicated-loan borrowers from 23 countries, we find that debt covenants are more prevalent in countries with stronger law enforcement, more developed private credit market, and higher financial reporting quality, and that debt covenants are less prevalent in countries with more extensive creditor rights laws. In addition, we find that timely loss recognition increases with the use of debt covenants; and that this association is greater in countries with strong law enforcement. Overall, we are the first to comprehensively document the use of debt covenants across countries. Our findings shed light on how the use of accounting numbers in debt contracts responds to institutional arrangements that characterize contracting environments, and how it in turn shapes financial reporting practices across different legal regimes.

Keywords: Financial covenants, conservatism, cross-country studies, debt contracting

JEL Classification: M47, G15

Suggested Citation

Hong, Hyun A. and Hung, Mingyi and Zhang, Jieying, The Use of Debt Covenants Worldwide: Institutional Determinants and Implications on Financial Reporting (August 25, 2011). Available at SSRN: https://ssrn.com/abstract=1496611 or http://dx.doi.org/10.2139/ssrn.1496611

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Mingyi Hung

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Jieying Zhang (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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