Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?
AbstractRecent years have seen a sharp decline in the use of balance sheet-based covenants in private debt contracts. I hypothesize that changes in accounting standards can explain part of this decline. Standard setting has shifted towards a “balance sheet approach”, which I predict has made the balance sheet less useful for contracting. I measure the effect of the balance sheet approach on specific borrowers using a volatility ratio. I find that borrowers with greater volatility ratios are less likely to have balance sheet-based covenants. This evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Accounting and Economics.
Volume (Year): 52 (2011)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/jae
Debt contracting; Covenants; Accounting standards; Balance sheet;
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- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- M48 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Government Policy and Regulation
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- Masaki Kusano, 2012. "Does the Balance Sheet Approach Improve the Usefulness of Accounting Information?," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 139-152, December.
- Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
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