Evidence of Risk-Shifting from Debt Covenant Violations

2009 ◽  
Author(s):  
Beatriz Mariano
Keyword(s):  
Risk Shifting ◽  
Debt Covenant ◽  
Covenant Violations

The Impact of Financial Covenants in Private Loan Contracts on Classification Shifting

2019 ◽  
Vol 65 (8) ◽  
pp. 3637-3653 ◽  
Author(s):  
Yun Fan ◽  
Wayne B. Thomas ◽  
Xiaoou Yu
Keyword(s):  
Earnings Forecasts ◽  
Management Technique ◽  
Loan Contracts ◽  
Special Items ◽  
Classification Shifting ◽  
Distressed Firms ◽  
Debt Covenant ◽  
The Impact ◽  
Covenant Violations ◽  
Private Loan

This study examines whether firms with private loan contracts that contain debt covenants based on earnings before interest, taxes, depreciation, and amortization (EBITDA) are more likely to misclassify core expenses as special items (i.e., classification shift). Misclassifying core expenses as income-decreasing special items allows the firm to increase EBITDA and thereby potentially avoid debt covenant violations. Consistent with our expectation, firms misclassify core expenses as special items when at least one EBITDA-related financial covenant is close to being violated. In addition, classification shifting is more prominent when financially distressed firms are close to violating at least one EBITDA-related covenant. Whereas prior research on classification shifting focuses primarily on equity market incentives (e.g., meeting analysts’ earnings forecasts), our study extends this research to private loan contracts to highlight that creditors also affect classification shifting. Classification shifting appears to be an additional earnings management technique used by managers to avoid debt covenant violations. This paper was accepted by Shivaram Rajgopal, accounting.

Creditor Influence and CEO Compensation: Evidence from Debt Covenant Violations

2018 ◽  
Vol 93 (5) ◽  
pp. 23-50 ◽  
Author(s):  
Steven Balsam ◽  
Yuqi Gu ◽  
Connie X. Mao
Keyword(s):  
Risk Taking ◽  
Ceo Compensation ◽  
Regression Discontinuity ◽  
Firm Dynamics ◽  
Debt Covenants ◽  
Compensation Package ◽  
Debt Covenant ◽  
Debt Covenant Violation ◽  
The Right ◽  
Covenant Violations

ABSTRACT Debt covenant violation alters firm dynamics, providing creditors with the right to demand repayment, and via that right, influence firm actions. We provide evidence consistent with creditors employing that channel to influence CEO compensation. Using regression discontinuity analysis, we show that in the year after a covenant violation, after controlling for other factors, CEO compensation is 8.5 percent lower and the CEO's compensation package contains fewer risk-taking incentives, as the vega associated with newly granted options is 26 percent lower. These changes are more pronounced when the creditor has greater influence, such as when the borrower and creditor have a prior lending relationship, the creditor is a highly reputable bank, or when the borrower is financially weaker. We also find that CEOs' risk-taking incentives decrease with the number of debt covenants; in particular, the number of performance debt covenants being breached. JEL Classifications: G21; G34.

Incentives and Penalties Related to Earnings Overstatements that Violate GAAP

1999 ◽  
Vol 74 (4) ◽  
pp. 425-457 ◽  
Author(s):  
Messod D. Beneish
Keyword(s):  
Insider Trading ◽  
Efficient Method ◽  
Corporate Performance ◽  
Securities And Exchange Commission ◽  
External Financing ◽  
Trading Behavior ◽  
The Face ◽  
Debt Covenant ◽  
The Cost ◽  
Covenant Violations

This paper investigates the incentives and the penalties related to earnings overstatements primarily in firms that are subject to accounting enforcement actions by the Securities and Exchange Commission (SEC). I find (1) that managers in treatment firms are more likely to sell their holdings and exercise stock appreciation rights in the period when earnings are overstated than are managers in control firms, and (2) that the sales occur at inflated prices. I do not find evidence that earnings overstatement in these firms is motivated by concerns about debt covenant violations or the cost of external financing. The evidence suggests that the monitoring of managers' trading behavior can be informative about the likelihood of earnings overstatement. Many economists believe that insider trading is an efficient method of compensating managers for their efforts. These economists argue that reputation losses would preclude managers from making profitable trades before periods of poor corporate performance. Consequently, this paper also investigates the employment and monetary penalties imposed on managers after the earnings overstatement is publicly discovered. This evidence reveals that (1) managers' employment losses subsequent to discovery are similar in firms that do and do not overstate earnings and (2) that the SEC is not likely to impose trading sanctions on managers in firms with earnings overstatement unless the managers sell their own shares as part of a firm security offering. The evidence suggests that neither employment or SEC-imposed monetary losses are effective in preventing the managers in these firms with extreme earnings overstatements from selling their stake in their firms in the face of declining performance.

Reporting and Non-Reporting Incentives in Leasing

2019 ◽  
Vol 94 (6) ◽  
pp. 137-164 ◽  
Author(s):  
Judson Caskey ◽  
N. Bugra Ozel
Keyword(s):  
Capital Markets ◽  
Second Order ◽  
Present Value ◽  
Reporting Incentives ◽  
Weak Evidence ◽  
Operating Leases ◽  
Tax Deductions ◽  
Debt Covenant ◽  
Covenant Violations ◽  
Jel Classifications

ABSTRACT This study sheds light on the extent to which the use of operating leases depends on reporting incentives, such as understating liabilities, and non-reporting incentives that partly arise from the overlap between accounting, bankruptcy, and tax laws, such as increasing financing capacity and flexibility. We provide evidence that expanding financing capacity, accommodating volatile operations, and maximizing the present value of tax deductions are all important drivers of leasing decisions. Our findings suggest that capital markets and contracting-based reporting incentives have little influence on operating lease use. In particular, we find weak evidence that firms increase operating leases in advance of issuing equity, and no evidence that firms use operating leases to window-dress in advance of issuing debt, to avoid debt covenant violations, for compensation purposes, or to paint a better picture on an ongoing basis. These findings are consistent with reporting incentives playing a second-order role in leasing decisions. JEL Classifications: G32; G33; K34; M41.

Debt Covenant Violations and Trade Credit

2014 ◽  
Author(s):  
Zilong Zhang
Keyword(s):  
Trade Credit ◽  
Debt Covenant ◽  
Covenant Violations

Do debt covenant violations serve as a risk factor of ineffective internal control?

2018 ◽  
Vol 52 (1) ◽  
pp. 231-251
Author(s):  
Jun Guo ◽  
Pinghsun Huang ◽  
Yan Zhang
Keyword(s):  
Risk Factor ◽  
Internal Control ◽  
Debt Covenant ◽  
Covenant Violations

Debt-covenant violations and managers' accounting responses

1994 ◽  
Vol 17 (3) ◽  
pp. 281-308 ◽  
Author(s):  
Amy Patricia Sweeney
Keyword(s):  
Debt Covenant ◽  
Covenant Violations

scholarly journals The Market Response to Implied Debt Covenant Violations

2018 ◽  
Author(s):  
Derrald Stice
Keyword(s):  
Market Response ◽  
Debt Covenant ◽  
Covenant Violations

Debt Covenant Violations and Employee Safety

2021 ◽  
Author(s):  
Chandrani Chatterjee ◽  
Lars Helge Hass ◽  
Paul Hribar ◽  
Fani Kalogirou
Keyword(s):  
Employee Safety ◽  
Debt Covenant ◽  
Covenant Violations
Sign in / Sign up

Export Citation Format

Share Document