TY - JOUR
T1 - Further Evidence on Consequences of Debt Covenant Violations
AU - Gao, Yu
AU - Khan, Mozaffar
AU - Tan, Liang
N1 - Publisher Copyright:
© CAAA
PY - 2017/9/1
Y1 - 2017/9/1
N2 - 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.
AB - 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.
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U2 - 10.1111/1911-3846.12303
DO - 10.1111/1911-3846.12303
M3 - Article
AN - SCOPUS:85021346146
SN - 0823-9150
VL - 34
SP - 1489
EP - 1521
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
IS - 3
ER -