Title

Further Evidence on Consequences of Dept Covenant Violations

Department/School

Accounting

Date of this version

2017

Document Type

Article

Abstract

We present new evidence on debt covenant violation (DCV) consequences that have not previously been examined in the literature. In particular, we show that a DCV triggers significant information asymmetry and uncertainty on the part of shareholders and auditors as reflected in higher bid–ask spreads, return volatility, and audit fees. Further, these consequences occur even when lender‐imposed costs are relatively lower, consistent with the act of default itself triggering shareholder and auditor uncertainty. The results highlight costs to the firm of having bright‐line rules in contracts, and add to an understanding of the consequences of DCVs.

Published in

Contemporary Accounting Research

Citation/Other Information

34(3), 1489-1521

We acknowledge helpful comments from seminar participants at Chinese University of Hong Kong, Harvard Business School, Singapore Management University, Southern Methodist University, University of Minnesota, University of Toronto, the McMaster University 2013 Conference, the Midwest 2013 Accounting Conference, and the 2014 MIT Asia Conference in Accounting.

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