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Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?

Listed author(s):
  • Demerjian, Peter R.
Registered author(s):

    Recent 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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    File URL: http://www.sciencedirect.com/science/article/pii/S0165410111000607
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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 52 (2011)
    Issue (Month): 2 ()
    Pages: 178-202

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    Handle: RePEc:eee:jaecon:v:52:y:2011:i:2:p:178-202
    DOI: 10.1016/j.jacceco.2011.08.004
    Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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