Direct Evidence on the Informational Properties of Earnings in Loan Contracts

2017/02/28 by SCOTT D. DYRENG, Scott Dyreng, RAHUL VASHISHTHA +3 · 1 citation
Business, Management and Accounting · #Auditing, Earnings Management, Governance #Financial Reporting and Valuation Research #Corporate Finance and Governance

paper · doi:10.1111/1475-679x.12168

Abstract

Using a sample of firms that disclose the realizations of earnings used for determining covenant compliance in loan contracts, we provide direct evidence on the informational properties of earnings used in the performance covenants included in debt contracts. We find that the earnings measure used in performance covenants does not exhibit asymmetric loss timeliness and has significantly greater cash flow predictive ability than GAAP measures of earnings. We suggest that these results reflect the idea that contracting parties design accounting rules for performance covenants to enhance their efficacy as “tripwires.”

Citations

• Sample Selection Bias as a Specification Error
• Accounting Conservatism and the Efficiency of Debt Contracts

Cited by

• Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective
• Accounting Earnings and Economic Growth, Trends, and Challenges: A Bibliometric Approach. [europepmc]

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