The Effect of Accounting-Based Debt Covenant Disclosures on Shareholder Wealth
The International Journal of Business and Finance Research, v. 11 (2) p. 61-78
18 Pages Posted: 8 Nov 2017
Date Written: 2017
This study examines whether disclosures of the terms of accounting-based debt covenants affect shareholder wealth. Specifically, I focus on market reaction at the time of the announcement of technical default. I find that firms that disclosed the terms of the covenants in prior Securities and Exchange Commission (SEC) filings experience less negative price response during the three-day window surrounding the announcements. I also provide evidence that the market reaction to technical default varies systematically with the size of the debt contract over total liabilities, which I use as a proxy for the materiality of the contract. Further analyses show that through such disclosure, first, there is less shareholder wealth loss, in particular, at firms where the contracts are less material, and, second, the relation between market reaction to technical default and the materiality of the contract is significant only when the contracts are material. These findings have financial reporting implications for standard setters.
Keywords: Shareholder Wealth, Debt Covenants, Technical Default, Voluntary Disclosures, Materialit
JEL Classification: M41, M48
Suggested Citation: Suggested Citation