File Download
There are no files associated with this item.
Links for fulltext
(May Require Subscription)
- Publisher Website: 10.1111/jbfa.12321
- Scopus: eid_2-s2.0-85050497226
- WOS: WOS:000449818800007
- Find via
Supplementary
- Citations:
- Appears in Collections:
Article: The market response to implied debt covenant violations
Title | The market response to implied debt covenant violations |
---|---|
Authors | |
Keywords | debt covenant violation technical default debt contracts private lending agreements implied violation |
Issue Date | 2018 |
Citation | Journal of Business Finance and Accounting, 2018, v. 45, n. 9-10, p. 1195-1223 How to Cite? |
Abstract | © 2018 John Wiley & Sons Ltd Previous research documents a negative stock price reaction to the announcement of a debt covenant violation (DCV). However, managers of firms that violate a covenant often obtain waivers and renegotiate debt contracts with lenders before the SEC requires them to disclose a violation. Firms therefore may not report some covenant violations, and prior research has not documented their cost to shareholders. Exploiting the fact that over half of all private debt contracts contain a debt covenant reliant on some variation of accounting earnings, I construct a sample of firms with debt contracts that contain at least one earnings-based covenant. Combining earnings-based-covenant contract values from debt agreements with information publicly available at the earnings announcement date, I predict firms in violation of a debt covenant and provide evidence that equity investors react negatively to these implied violations, regardless of whether managers ever disclose that a violation occurred. In additional tests, I find no evidence of a negative stock price reaction to a firm disclosure of a DCV that market participants could infer from previously reported earnings, but I demonstrate that equity investors do react to the disclosure of a violation of a balance-sheet covenant that would not have been inferable. This study complements previous research on DCVs by documenting the costliness to shareholders of violations subsequently resolved with lenders but not disclosed. |
Persistent Identifier | http://hdl.handle.net/10722/273629 |
ISSN | 2023 Impact Factor: 2.2 2023 SCImago Journal Rankings: 1.283 |
ISI Accession Number ID |
DC Field | Value | Language |
---|---|---|
dc.contributor.author | Stice, Derrald | - |
dc.date.accessioned | 2019-08-12T09:56:11Z | - |
dc.date.available | 2019-08-12T09:56:11Z | - |
dc.date.issued | 2018 | - |
dc.identifier.citation | Journal of Business Finance and Accounting, 2018, v. 45, n. 9-10, p. 1195-1223 | - |
dc.identifier.issn | 0306-686X | - |
dc.identifier.uri | http://hdl.handle.net/10722/273629 | - |
dc.description.abstract | © 2018 John Wiley & Sons Ltd Previous research documents a negative stock price reaction to the announcement of a debt covenant violation (DCV). However, managers of firms that violate a covenant often obtain waivers and renegotiate debt contracts with lenders before the SEC requires them to disclose a violation. Firms therefore may not report some covenant violations, and prior research has not documented their cost to shareholders. Exploiting the fact that over half of all private debt contracts contain a debt covenant reliant on some variation of accounting earnings, I construct a sample of firms with debt contracts that contain at least one earnings-based covenant. Combining earnings-based-covenant contract values from debt agreements with information publicly available at the earnings announcement date, I predict firms in violation of a debt covenant and provide evidence that equity investors react negatively to these implied violations, regardless of whether managers ever disclose that a violation occurred. In additional tests, I find no evidence of a negative stock price reaction to a firm disclosure of a DCV that market participants could infer from previously reported earnings, but I demonstrate that equity investors do react to the disclosure of a violation of a balance-sheet covenant that would not have been inferable. This study complements previous research on DCVs by documenting the costliness to shareholders of violations subsequently resolved with lenders but not disclosed. | - |
dc.language | eng | - |
dc.relation.ispartof | Journal of Business Finance and Accounting | - |
dc.subject | debt covenant violation | - |
dc.subject | technical default | - |
dc.subject | debt contracts | - |
dc.subject | private lending agreements | - |
dc.subject | implied violation | - |
dc.title | The market response to implied debt covenant violations | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1111/jbfa.12321 | - |
dc.identifier.scopus | eid_2-s2.0-85050497226 | - |
dc.identifier.volume | 45 | - |
dc.identifier.issue | 9-10 | - |
dc.identifier.spage | 1195 | - |
dc.identifier.epage | 1223 | - |
dc.identifier.eissn | 1468-5957 | - |
dc.identifier.isi | WOS:000449818800007 | - |
dc.identifier.issnl | 0306-686X | - |