An empirical examination of debt covenant restrictions and accounting-related debt proxies

Abstract Prior studies of discretionary accounting choices have generally relied on one or more proxy variables to measure closeness to debt covenant restrictions without actually examining the existence or extent of restrictive covenants. This study tests the validity of the most commonly used proxy, the debt–equity ratio, by examining its relation to actual debt covenant restrictions for a random sample of U.S. firms. The results indicate that several versions of the debt–equity ratio capture the existence and tightness of retained earnings restrictionsand the existence of net tangible asset and working capital restrictions, but are unrelated to four other covenant restrictions.

[1]  Robert L. Vigeland,et al.  The effects of debt covenants and political costs on the choice of accounting methods: The case of accounting for R&D costs , 1983 .

[2]  Victor Pastena,et al.  Determinants of intramethod choice in the oil and gas industry , 1982 .

[3]  Gerald L. Salamon,et al.  The effect of owner versus management control on the choice of accounting methods , 1982 .

[4]  Robert M. Bowen,et al.  Determinants of the corporate decision to capitalize interest , 1981 .

[5]  F. Ayres,et al.  Characteristics of firms electing early adoption of SFAS 52 , 1986 .

[6]  Victor S. Pastena,et al.  Accounting for leases by lessees , 1986 .

[7]  Lauren O. Kelly.  Corporate Management Lobbying on FAS No. 8: Some Further Evidence , 1985 .

[8]  Jere R. Francis,et al.  Determinants of corporate pension funding strategy , 1987 .

[9]  I. Zimmer.  Accounting for interest by real estate developers , 1986 .

[10]  Robert L. Hagerman,et al.  An income strategy approach to the positive theory of accounting standard setting/choice , 1981 .

[11]  S. Siegel,et al.  Nonparametric Statistics for the Behavioral Sciences , 2022, The SAGE Encyclopedia of Research Design.

[12]  G. W. Snedecor.  Statistical Methods , 1964 .

[13]  A. Kalay,et al.  Stockholder-bondholder conflict and dividend constraints , 1982 .

[14]  George Foster,et al.  Financial Statement Analysis. , 1980 .

[15]  D. Collins,et al.  The proposed elimination of full cost accounting in the extractive petroleum industry: An empirical assessment of the market consequences , 1979 .

[16]  Jerold B. Warner,et al.  On financial contracting: An analysis of bond covenants , 1979 .

[17]  H. G. Hunt,et al.  Potential Determinants Of Corporate Inventory Accounting Decisions , 1985 .

[18]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[19]  Robert W. Holthausen,et al.  The economic consequences of accounting choice implications of costly contracting and monitoring , 1983 .