Informed Trading on Debt Covenant Violations: The Long and Short of It

27 Pages Posted: 19 Mar 2020

See all articles by Yushu Zhu

Yushu Zhu

University of Queensland - Business School

Jennifer Gippel

Australian National University (ANU)

Date Written: March 2017

Abstract

We examine whether disclosure of complex information events reduces information asymmetry by investigating the long‐ and short‐term impact of firms' disclosure of debt covenant violations on the probability of informed trading. We argue debt covenant violation disclosures provide informed agents with a long window of opportunity to trade on their private information largely due to the uncertainty arising from the debt renegotiation process. We find the probability of informed trading is greater after the disclosure, particularly when the violation outcomes are unresolved or where there is concern about possible future violations.

Keywords: Debt covenant violation disclosure, Information asymmetry, Probability of informed trading

Suggested Citation

Zhu, Yushu and Gippel, Jennifer, Informed Trading on Debt Covenant Violations: The Long and Short of It (March 2017). Accounting & Finance, Vol. 57, Issue 1, pp. 289-315, 2017, Available at SSRN: https://ssrn.com/abstract=3556030 or http://dx.doi.org/10.1111/acfi.12126

Yushu Zhu (Contact Author)

University of Queensland - Business School ( email )

Blair Drive
Brisbane
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/yushu-elizabeth-zhu

Jennifer Gippel

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

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