Board monitoring and covenant restrictiveness in private debt contracts during the global financial crisis

Abstract

We examine the association between board independence and restrictiveness of covenants in U.S. private debt contracts around the global financial crisis (GFC). We show that board independence is associated with less restrictive covenants suggesting lenders willingness to delegate some monitoring of firms with independent boards. More nuanced analysis between the pre-GFC, GFC and post-GFC periods shows mixed results and we suggest that, during the GFC and its aftermath, lenders place more emphasis on ex ante screening relative to ex post monitoring. We contribute to the literature by providing evidence on covenant use and lenders choices in periods of credit rationing.

Accounting conservatism and firm performance during the COVID‐19 pandemic

“…where X is earnings per share, R is stock returns, D is a dummy variable equal to one when R < 0 and zero otherwise, SIZE is firm size computed as the natural logarithm of total assets (Abu Bakar et al, 2020;Keshk et al, 2020), LEV is the leverage ratio, defined as total debts divided by total assets (Hsu et al, 2020), and MB is the market-to-book ratio (Wei et al, 2020). To estimate conservatism prior to the Covid-19 outbreak, all variables in Equation ( 1) are measured in the fiscal period ending before 1 January 2020.…”

Employee disclosures in the grocery industry before the COVID‐19 pandemic

“…Big 4 auditor is also measured as a dichotomous variable with appointment of a Big 4 auditor equal to one and zero otherwise. Bakar et al, 2020;Hartnett and Shamsuddin, 2020), and existence of audit (Keshk et al, 2020;Khoo et al, 2020), nomination and remuneration committee (ASX Corporate Governance Council, 2019).…”

“…Corporate governance variables are measured with reference to ASX Corporate Governance Council recommendations and include measures of board monitoring including board size, independent board, independent chair, dual CEO/chair (Abu Bakar et al, 2020;Hartnett and Shamsuddin, 2020), and existence of audit (Keshk et al, 2020;Khoo et al, 2020), nomination and remuneration committee (ASX Corporate Governance Council, 2019).…”

The Effect of Managerial Ownership, Covenant Debt and Litigation Risk on Accounting Conservatism

“…In addition, [28] in his research stated that the content of long-term debt contracts (debt covenants) is about agreements that can protect creditors' rights in the future from the actions of managers against their interests in the future. Research [3], [25], [29] stated that leverage as a proxy for long-term debt contracts (debt covenants) has a negative effect on accounting conservatism, but it is different from the results of research [3], [11], [30] which stated that leverage has a positive and significant effect on accounting conservatism.…”

“…In addition to the problem of the lack of managerial ownership, which encourages the increasing demand for conservative financial statements. Managers in responding to violations of debt agreements that have matured, will try to avoid poor performance by carrying out accounting conservatism which will later benefit him [11], [26], [27]. Whereas debt covenants explain how management responds and reacts to the debt agreements it manages [7].…”