Further Evidence on Consequences of Debt Covenant Violations

Yu Gao, Mozaffar Khan, Liang Tan

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1489-1521
Number of pages33
JournalContemporary Accounting Research
Volume34
Issue number3
DOIs
StatePublished - Sep 1 2017

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