Further Evidence on Consequences of Debt Covenant Violations

• 成果类型: Article
• 署名作者: Gao, Yu; Khan, Mozaffar; Tan, Liang
• 署名单位: University of St Thomas Minnesota; Harvard University; University of Minnesota System; University of Minnesota Twin Cities; George Washington University
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12303
• 发表日期: 2017
• 页码: 1489-1521
• 关键词: economic consequences; Control rights; Price delay; INFORMATION; firm; COSTS; size

摘要

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.