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Debt Contractsin the Presence of Performance Manipulation

Author

Listed:
  • Guttman, Ilan

    (NYU)

  • Marinovic, Ivan

    (Stanford University)

Abstract

Empirical and survey evidence suggest that firms often manipulate reported numbers to avoid debt covenant violations. The theoretical literature, by and large, has ignored the consequences of this phenomenon on debt contracting. Departing from a standard debt financing setting with continuation decisions based on reported contractible signals, we study how firms ability to manipulate reports affect the design of debt contracts. The model generates an array of novel (and perhaps surprising) empirical predictions regarding the optimal covenant, the interest rate, the efficiency of the continuation/liquidation decisions, and the likelihood of covenant violations.

Suggested Citation

  • Guttman, Ilan & Marinovic, Ivan, 2017. "Debt Contractsin the Presence of Performance Manipulation," Research Papers 3495, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3495
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/429221
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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