Dynamic threshold values in earnings-based covenants

Li, Ningzhong; Vasvari, Florin P.; Wittenberg-Moerman, Regina

doi:10.1016/j.jacceco.2015.07.004

Cited by 57 publications

(34 citation statements)

References 48 publications

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“…Li, Vasvari, and Wittenberg‐Moerman [] analyze another potentially important efficiency channel—the dynamic allocation of control rights over the life of the loan. They study accounting‐based covenants with threshold values that become more restrictive over the life of the loan.…”

Section: Open Questions and Future Directionsmentioning

confidence: 99%

“…The evidence in Christensen and Nikolaev [2012], Dyreng, Vashishtha, and Weber [2014], Hollander and Verriest [2015], and Honigsberg et al [2015] is broadly consistent with this hypothesis. Li, Vasvari, and Wittenberg-Moerman [2015] analyze another potentially important efficiency channel-the dynamic allocation of control rights over the life of the loan. They study accounting-based covenants with threshold values that become more restrictive over the life of the loan.…”

Section: Contracting?mentioning

confidence: 99%

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Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Christensen

Nikolaev

Wittenberg-Moerman

2016

J of Accounting Research

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245

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This paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers. Its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research. We argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved. By discussing its rich theoretical implications, we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency. JEL codes: G32; G34; M40; M41

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Section: Open Questions and Future Directionsmentioning

confidence: 99%

Section: Contracting?mentioning

confidence: 99%

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Christensen

Nikolaev

Wittenberg-Moerman

2016

J of Accounting Research

Self Cite

245

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“…Li, Vasvari, and Wittenberg‐Moerman () document that some covenants provide underperforming borrowers with a grace period by requiring less restrictive initial thresholds, a period of temporary reduction in the restrictiveness of covenant thresholds following the loan's issuance i.e., a ‘grace period’. We identify 3,082 packages as providing borrowers with a grace period.…”

Section: Resultsmentioning

confidence: 99%

Debt contract strictness and auditor specialization

Callahan

Peters

Zhang

2019

Business Fin & Account

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The conflicts of interest among managers, shareholders and creditors resulting in agency costs, can be mitigated by restricting managers' adverse behavior, through financial covenants to better align the various stakeholder interests. Thus, debt contract strictness represents an important aspect of agency costs between creditors, shareholders, and management that is not always captured by interest rates. The contract setting provides a unique opportunity to investigate how creditors may rely on auditors to alleviate information uncertainty stemming from reliance on management's financial reporting and thus alleviate the creditor's potential loss of invested capital. After controlling for borrower risks, loan characteristics, and audit factors, we show that auditor industry specialization is significantly associated with a reduction in the strictness of debt contracts, consistent with creditors viewing certain industry expert auditors as effective monitors against financial reporting manipulation aimed at the avoidance of debt covenant triggers that protect creditors against potential loss. Further, we find that the association between loan strictness and auditor specialization is attenuated by stronger corporate governance systems, external monitors, and prior lender relationships. K E Y W O R D Sauditor specialization, corporate governance, loan strictness

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“…However, this analysis presents significant challenges because covenant thresholds vary over time (Fang 2011;Li, Vasvari, and Wittenberg Moerman 2014), which introduces measurement error into the tightness estimation.…”

Section: Imentioning

confidence: 99%

Renegotiation and the Choice of Covenants in Debt Contracts

Saavedra

2015

SSRN Journal

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I investigate whether and how expected future contract renegotiation considerations affect the type of covenants used in ex-ante debt contracts. I find that when future contract renegotiation costs are expected to be high, debt contracts are less likely to include covenants that restrict the borrower's financial flexibility in good states. This finding suggests that when renegotiation costs are high, borrowers and lenders avoid the use of covenants that are more likely to hold up the borrower and force it to bypass valueenhancing corporate policies (e.g., investments). Consistent with this interpretation, the negative relationship between renegotiation costs and the presence of flexibility-reducing covenants becomes stronger when the borrower has fewer outside options and financial flexibility becomes more valuable. Finally, I find that when future renegotiation costs are expected to be high, debt contracts have more covenants that are directly linked to the current performance of the borrower, which allows for a more efficient allocation of decision rights between the borrower and lenders. Overall, this study provides initial evidence about how renegotiation considerations affect the design of covenant packages in debt contracts.

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Dynamic threshold values in earnings-based covenants

Cited by 57 publications

References 48 publications

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Debt contract strictness and auditor specialization

Renegotiation and the Choice of Covenants in Debt Contracts

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