Discussion of 'Accounting Standards and Debt Covenants: Has the 'Balance Sheet Approach' Led to a Decline in the Use of Balance Sheet Covenants?'

16 Pages Posted: 12 Nov 2011  

Douglas J. Skinner

The University of Chicago - Booth School of Business

Date Written: November 11, 2011

Abstract

Demerjian (2011) argues that a shift by U.S. standard setters towards the balance sheet approach reduces the usefulness of balance sheet numbers for contracting. Consistent with this argument, he provides evidence of a decline in the use of balance sheet-based covenants in debt contracts, a useful finding. Nevertheless, I argue that the evolution of standard-setting is more complex than this argument implies, and evaluate the economic basis of Demerjian’s arguments for how debt contracts respond to changes in accounting rules. One conclusion that emerges is that there are still some important open issues regarding the economic determinants of debt contracts.

Suggested Citation

Skinner, Douglas J., Discussion of 'Accounting Standards and Debt Covenants: Has the 'Balance Sheet Approach' Led to a Decline in the Use of Balance Sheet Covenants?' (November 11, 2011). Available at SSRN: https://ssrn.com/abstract=1958171 or http://dx.doi.org/10.2139/ssrn.1958171

Douglas J. Skinner (Contact Author)

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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