Bank debt covenants and firms' responses to FAS 150 liability recognition: evidence from trust preferred stock

• 成果类型: Article
• 署名作者: Moser, William; Newberry, Kaye; Puckett, Andy
• 署名单位: University of Missouri System; University of Missouri Columbia; University of Houston System; University of Houston; University of Tennessee System; University of Tennessee Knoxville
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-011-9143-x
• 发表日期: 2011
• 页码: 355-376
• 关键词: balance-sheet; CONTRACTS

摘要

We examine the relation between accounting-based debt contracts and the economic response of firms with trust preferred stock (TPS) to mandated liability recognition under Financial Accounting Standard (FAS) 150. Our results show that firms' financial covenants significantly affect their choice to redeem versus reclassify their outstanding TPS. Specifically, firms with bank debt covenants that would be adversely impacted by recognizing TPS as a debt liability are 26.88% more likely to redeem their TPS after FAS 150. We also find that firms are significantly more likely to redeem versus reclassify their TPS after FAS 150 if they used the original TPS proceeds to retire existing debt (id est, to enhance their balance sheets). Our findings suggest that when bank debt contracts use floating Generally Accepted Accounting Principles (GAAP) to construct financial covenant terms, changes in the underlying GAAP measure significantly influence firms' economic behavior.