Debt Covenants and Accounting Manipulation

2021 ◽  
Author(s):  
Volker Laux
Keyword(s):  
Firm Value ◽  
Accounting Information ◽  
Debt Covenants ◽  
Control Rights ◽  
Ex Ante ◽  
Per Se

This paper studies the effects of allocating control rights to lenders via debt covenants when managers can sometimes misreport the accounting information on which the covenants are based. When contract renegotiation is exogenously prohibited, including a covenant in the contract is ex ante optimal because it increases both the probability that poor projects are liquidated and the manager's effort incentive. When the parties can renegotiate the contract, the results can flip: Granting the lender more control can lead to less frequent liquidations of low-quality projects and lower managerial effort incentives and thereby reduce the manager's ex ante payoff. The key behind these results is not the manager's incentive to misreport per se but her desire to take subsequent actions that conceal the misreporting. The model generates predictions regarding the determinants of accounting-based covenants, and the effects of covenants on misreporting, managerial effort, the frequency of liquidations, and firm value.

The Relation between Accounting Information in Debt Covenants and Operating Leases

2015 ◽  
Vol 29 (4) ◽  
pp. 969-996 ◽  
Author(s):  
Daniel Gyung H. Paik ◽  
Joyce A. van der Laan Smith ◽  
Brandon Byunghwan Lee ◽  
Sung Wook Yoon
Keyword(s):  
Balance Sheet ◽  
Accounting Information ◽  
Debt Covenants ◽  
Debt Contracts ◽  
Debt Contracting ◽  
Income Statement ◽  
Operating Leases ◽  
The Impact ◽  
Accounting Ratios ◽  
Lease Accounting

SYNOPSIS Proposed changes by the FASB and the IASB to lease accounting standards will substantially change the accounting for operating leases by requiring the capitalization of future lease payments. We consider the impact of these changes on firms' debt covenants by examining the frequency of income-statement- versus balance-sheet-based accounting ratios in debt covenants of firms in high and low Off Balance Sheet (OBS) lease industries. Based on debt contracts from the 1996–2009 period, our results provide evidence that lenders focus on balance sheet (income statement) ratios in designing debt covenants for borrowers in low (high) OBS lease industries. Further, the use of balance-sheet- (income-statement-) based covenants falls (rises) faster in high OBS lease industries than in low OBS lease industries as the use of OBS leasing increases. This evidence indicates that OBS operating leases influence lenders' use of accounting information in covenants, suggesting that creditors consider the impact of OBS leases when structuring debt agreements. These results also suggest that the proposed capitalization of OBS leases may not result in firms violating loan covenants but will make the balance sheet a more complete source of information for debt contracting by removing the need for constructive capitalization of OBS leases.

An Object-Oriented Model for Ex Ante Accounting Information

2003 ◽  
Vol 17 (1) ◽  
pp. 43-61 ◽  
Author(s):  
Peter Verdaasdonk
Keyword(s):  
Operations Management ◽  
Accounting Information ◽  
Object Oriented ◽  
Data Models ◽  
Management Decisions ◽  
Accounting Data ◽  
Alternative Future ◽  
Ex Ante ◽  
Behavioral Aspects

Present accounting data models such as the Resource-Event-Agent (REA) model merely focus on the modeling of static accounting phenomena. In this paper, it is argued that these models are not able to provide relevant ex ante accounting data for operations management decisions. These decisions require dynamic descriptions of the consequences of alternative future courses of actions and the resulting events. Therefore, a new object-oriented model is presented that enables the use of ex ante accounting data for this purpose. In comparison to the REA model, the object-oriented model presented in this paper includes new static aspects as “recipes,” “potential contracts,” and “reservations,” together with behavioral aspects expressed as theoretical scripts for the retrieval of relevant accounting data.

scholarly journals Weak Governance by Informed Active Shareholders

2020 ◽  
Author(s):  
Eitan Goldman ◽  
Wenyu Wang
Keyword(s):  
Firm Value ◽  
Corporate Decisions ◽  
Ex Post ◽  
Ex Ante ◽  
Generally True

Abstract Do informed shareholders who can influence corporate decisions improve governance? We demonstrate this may not be generally true in a model of takeovers. The model suggests that a shareholder’s ability to collect information and trade ex post may cause him, ex ante, to support pursuing value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence weakens governance and reduces firm value, even if such influence power can be used to reject bad takeovers ex post. Our model sheds light on the limitations of relying on informed, active shareholders to improve governance.

Revenue Manipulation and Restatements by Loss Firms

2008 ◽  
Vol 27 (2) ◽  
pp. 1-29 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Sean W. G. Robb ◽  
Dan Segal
Keyword(s):  
Firm Value ◽  
Cash Flows ◽  
Positive Relation ◽  
Credit Policy ◽  
Accounts Receivable ◽  
Market Participants ◽  
Ex Ante ◽  
Value Loss ◽  
History Of ◽  
Loss Firms

SUMMARY: This paper investigates the relation between the extent of a firm’s past and expected future losses or negative cash flows and the ex ante probability that it will manipulate revenues. When a firm has a string of losses or negative cash flows, traditional valuation models do not yield reliable estimates of firm value, and traditional price-earnings ratios are not meaningful. Evidence suggests that market participants tend to value loss firms on the basis of the level and growth in revenues, rather than cash flows and earnings, thereby motivating these firms to overstate revenue. In fact, empirical results indicate that there is a positive relation between the number of years that firms exhibit and/or anticipate losses or negative cash flows and investment in receivables after controlling for credit policy. We further show that the ex ante likelihood that firms manipulate revenue in violation of GAAP is positively associated with the history of past and expected future losses or negative cash flows, as well as with the investment in accounts receivable (adjusted for credit policy). Our results suggest another indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

Creditor Control Rights, Corporate Governance, and Firm Value

2012 ◽  
Vol 25 (6) ◽  
pp. 1713-1761 ◽  
Author(s):  
Greg Nini ◽  
David C. Smith ◽  
Amir Sufi
Keyword(s):  
Corporate Governance ◽  
Firm Value ◽  
Control Rights

scholarly journals CAN ACCOUNTING INFORMATION ACT AS A PROXY FOR EX ANTE UNCERTAINTY IN INITIAL PUBLIC OFFERINGS?

2003 ◽  
Vol 5 (2) ◽  
pp. 249 ◽  
Author(s):  
Tatang Ary Gumanti
Keyword(s):  
Empirical Evidence ◽  
Initial Public Offerings ◽  
Initial Public Offering ◽  
Accounting Information ◽  
Firm Risk ◽  
Public Offerings ◽  
Accounting Numbers ◽  
Ex Ante ◽  
Value Of Firm ◽  
Public Offering

This paper reviews and summarizes previous works and the rationale for the proposition that accounting information is in fact value relevant in the determination of an initial public offering IPO).Theoretical and empirical evidence has indicated that certain accounting measures can he used as proxies for total firm risk, that is, they could determine the riskiness of a corporation. The literature also advocates that accounting information is relevant in determining the value and thus the riskiness of a corporation through the use of accounting analysis. Since most of the information available in the prospectus is accounting information, it is arguable that this information represents a potential source for assessing the issuing firm. Some scholars have also advocated the possibility of using accounting information in assessing the value of firm making an IPO. Numerous papers have provided analytical and empirical evidence of the association between accounting numbers and the value of IPOs. The conclusion generally comes to show that information in the prospectus is value relevant concerning the IPO. The paper shows that it is indeed an arguable to use accounting information in the valuation of an IPO. Accordingly, it is an empirical issue whether accounting information has the property in explaining the ex-ante uncertainty of an IPO.

scholarly journals Data as asset? The measurement, governance, and valuation of digital personal data by Big Tech

2021 ◽  
Vol 8 (1) ◽  
pp. 205395172110173
Author(s):  
Kean Birch ◽  
DT Cochrane ◽  
Callum Ward
Keyword(s):  
Personal Data ◽  
User Engagement ◽  
Control Rights ◽  
The World ◽  
User Data ◽  
Asset Class ◽  
Revenue Streams ◽  
Per Se ◽  
Political Economic ◽  
And Control

Digital personal data is increasingly framed as the basis of contemporary economies, representing an important new asset class. Control over these data assets seems to explain the emergence and dominance of so-called “Big Tech” firms, consisting of Apple, Microsoft, Amazon, Google/Alphabet, and Facebook. These US-based firms are some of the largest in the world by market capitalization, a position that they retain despite growing policy and public condemnation—or “techlash”—of their market power based on their monopolistic control of personal data. We analyse the transformation of personal data into an asset in order to explore how personal data is accounted for, governed, and valued by Big Tech firms and other political-economic actors (e.g., investors). However, our findings show that Big Tech firms turn “users” and “user engagement” into assets through the performative measurement, governance, and valuation of user metrics (e.g., user numbers, user engagement), rather than extending ownership and control rights over personal data per se. We conceptualize this strategy as a form of “techcraft” to center attention on the means and mechanisms that Big Tech firms deploy to make users and user data measurable and legible as future revenue streams.

Debt Covenants and Corporate Governance

2019 ◽  
Vol 11 (1) ◽  
pp. 197-219 ◽  
Author(s):  
Sudheer Chava ◽  
Shunlan Fang ◽  
Praveen Kumar ◽  
Saumya Prabhat
Keyword(s):  
Empirical Studies ◽  
Empirical Literature ◽  
Future Research ◽  
Debt Covenants ◽  
Corporate Policies ◽  
Ex Post ◽  
Trade Offs ◽  
Ex Ante ◽  
The Impact ◽  
Covenant Violations

We review the recent theoretical and empirical literature on debt covenants with a particular focus on how creditor governance after covenant violations can influence the borrower's corporate policies. From the theoretical literature, we identify the key trade-offs that help explain the observed heterogeneity in covenant types, inclusion, likelihood of violation, and postviolation renegotiation flexibility. Empirically, we first review the literature that deals with ex ante evidence on covenant design and the various factors that influence covenant design; we next review the ex post evidence on the impact of technical covenant violations on the borrower. We then discuss limitations of the existing theoretical and empirical studies and conclude with some directions for future research in this burgeoning area.

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