Accounting quality, debt covenant design, and the cost of debt

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• 作者：Charlene P. Spiceland ; Leo L. Yang…
• 关键词：Accounting quality ; Debt covenants ; Covenant strictness ; Cost of debt
• 刊名：Review of Quantitative Finance and Accounting
• 出版年：2016
• 出版时间：November 2016
• 年：2016
• 卷：47
• 期：4
• 页码：1271-1302
• 全文大小：650 KB
• 刊物类别：Business and Economics
• 刊物主题：Economics
  Finance and Banking
  Accounting and Auditing
  Econometrics
  Operation Research and Decision Theory
  
• 出版者：Springer Netherlands
• ISSN：1573-7179
• 卷排序：47

文摘

We examine whether debt covenant design (threshold tightness, covenants frequency, covenant interdependence, and overall covenant strictness) reduces the adverse effect of poor accounting quality on the cost of debt in the private lending market. We predict and find that when borrowing firms exhibit low accounting quality, lenders tend to increase debt contract strictness through debt covenant design (e.g., increasing the number of covenants, decreasing covenant interdependence or including covenants with greater threshold tightness). Moreover, our results indicate that the cost of debt for borrowers with low accounting quality is significantly influenced by the covenant strictness. Further evidence shows that, although debt covenant designs help mitigate adverse information risk, financial reporting quality is more important than strict debt covenants in lowering the cost of debt, a matter of concern for firm managers and lenders.