Financial Contracts, Opportunism and Disclosure Management

REVIEW OF ACCOUNTING STUDIES, Vol 1, No. 3, 1997

Posted: 20 Dec 1996

Abstract

This paper shows that if all variables that determine a firm's future cash flows are not contractible, it can be ex-ante optimal to design a financial contract that admits debtholders waiving debt covenants on a discretionary basis and firms investing opportunistically subsequent to contracting. Further, as the contractible variable becomes less informative, the contract attaches greater significance to it. Finally, uncertainty in the magnitude of reporting latitude induces aggressive reporting by the firm to avoid violating the covenant or to enhance the changes of a waiver. The debtholders respond by sometimes not allowing the firm to implement mutually beneficial projects.

JEL Classification: G32, L14

Suggested Citation

Sridharan, Swaminathan and Magee, Robert P., Financial Contracts, Opportunism and Disclosure Management. REVIEW OF ACCOUNTING STUDIES, Vol 1, No. 3, 1997, Available at SSRN: https://ssrn.com/abstract=2839

Swaminathan Sridharan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8807 (Phone)
847-467-1202 (Fax)

Robert P. Magee (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2676 (Phone)
847-467-1202 (Fax)

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