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

Pace University Accounting Research Paper No. 2017/05

18 Pages Posted: 8 Nov 2017

See all articles by Ping Wang

Ping Wang

Pace University - Lubin School of Business

Date Written: 2017

Abstract

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

Wang, Ping, The Effect of Accounting-Based Debt Covenant Disclosures on Shareholder Wealth (2017). The International Journal of Business and Finance Research, v. 11 (2) p. 61-78; Pace University Accounting Research Paper No. 2017/05. Available at SSRN: https://ssrn.com/abstract=3043427

Ping Wang (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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