Journal of Accounting and Economics Vol. 52 No. 2-3 2011
Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?
Abstract
Recent years have seen a sharp decline in the use of balance sheet-based covenants in private debt contracts. I hypothesize that changes in accounting standards can explain part of this decline. Standard setting has shifted towards a “balance sheet approach”, which I predict has made the balance sheet less useful for contracting. I measure the effect of the balance sheet approach on specific borrowers using a volatility ratio. I find that borrowers with greater volatility ratios are less likely to have balance sheet-based covenants. This evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants.
- DOI
- 10.1016/j.jacceco.2011.08.004
- Volume
- 52
- Issue
- 2-3
- Pages
- 178-202
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref