The Importance of Excluding Accounting Changes from the Calculation of Debt Covenant Compliance

31 Pages Posted: 24 May 2000

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

K. Ramesh

Rice University

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 24, 2000

Abstract

In this paper we examine the ex-ante importance of accounting changes in debt contracts by examining how the exclusion of the flexibility to make voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan. After controlling for a selectivity correction and other factors known to affect loan spreads, we find that the interest rate charged on a loan is 40 basis points lower when mandatory accounting changes are excluded and is 104 basis points lower when voluntary accounting changes are excluded. Our results support findings in previous studies that accounting changes are important in debt contracts ex-post for borrowers who violate their accounting based covenants.

JEL Classification: G21, M41, G30

Suggested Citation

Beatty, Anne L. and Ramesh, K. and Weber, Joseph Peter, The Importance of Excluding Accounting Changes from the Calculation of Debt Covenant Compliance (April 24, 2000). Available at SSRN: https://ssrn.com/abstract=223733 or http://dx.doi.org/10.2139/ssrn.223733

Anne L. Beatty (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

K. Ramesh

Rice University ( email )

236 McNair Hall
Jones Graduate School of Business
Houston, TX 77005
United States
713.348.5380 (Phone)
713.348.6296 (Fax)

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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