Publication Type
Journal Article
Version
acceptedVersion
Publication Date
9-2022
Abstract
This study examines how managers change their forecasting behavior as a debt covenant violation approaches. Using a sample of firms that disclose a debt covenant violation (DCV) in their financial statements, we find that management forecasts are more optimistic in the period leading up to a DCV, and this result is not driven by managers’ unintentional forecast bias. Additionally, we find that managers who are more optimistic in their forecasts also take on more risk and increase dividend payouts before violations, consistent with managers strategically using earnings forecasts to justify their activities favorable to shareholders but likely to be curtailed by lenders in the event of a DCV. In addition, we find that managers are more likely to optimistically bias their earnings forecasts when they have a higher risk of losing control rights in the event of a DCV. Lastly, we find managers who are more optimistic in their forecasts are less likely to be replaced (i.e., lower CEO turnover) after a DCV. Overall, our results are consistent with managers changing their disclosure behavior in an attempt to justify actions that are favorable to equity investors but would likely be opposed by debtholders, which in turn improves their job security.
Keywords
Debt Covenant Violation, Strategic Disclosure, Risk-Shifting
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Reporting and Disclosure
Publication
Journal of Management Accounting Research
Volume
34
Issue
3
First Page
29
Last Page
57
ISSN
1049-2127
Identifier
10.2308/JMAR-2020-007
Publisher
American Accounting Association
Citation
BOURVEAU, Thomas; STICE, Derrald; and WANG, Rencheng.
Strategic disclosure and debt covenant violation. (2022). Journal of Management Accounting Research. 34, (3), 29-57.
Available at: https://ink.library.smu.edu.sg/soa_research/1855
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2308/JMAR-2020-007