Derrald Stice¹, Earl K. Stice², James D. Stice³

(1. Hong Kong University of Science & Technology, Hong Kong, China;

2. Nazarbayev University, Kazakhstan; 3. Brigham Young University, USA)

 

 

Abstract: Using a sample of 6,540 private debt issues, we test whether firms with more debt covenants in their debt contracts show evidence of more timely recognition of economic losses in earnings. We find in my sample of private debt issues that firms with more debt covenants in their debt contracts do not appear to have a higher degree of timely loss recognition, or accounting conservatism. This study complements the findings of Nikolaev (2010) that finds that, in a sample of public debt issues, firms with more debt covenants are more likely to recognize economic losses in accounting earnings in a more timely fashion. The results are consistent with the differing incentives that exist in the environments of public and private debt.

 

 

Key words: debt markets; debt covenants; accounting conservatism; private lending

 

JEL codes: G01, M4, M49