Earnings Management Around Debt-Covenant Violations � An Empirical Investigation Using a Large Sample of Quarterly Data

• Autores: Anand Jha
• Localización: Journal of Accounting Auditing and Finance, ISSN-e 2160-4061, ISSN 0148-558X, Vol. 28, Nº 4, 2013, págs. 369-396
• Idioma: inglés
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• Resumen

  • I find that managers manage earnings upward in the quarters preceding a debt-covenant violation, but downward in the quarter a violation occurs. And they continue to manage earnings downward while the firm remains in violation. Because this scenario can play out within a year, the use of yearly data to examine the debt-covenant hypothesis can be problematic. Further analysis shows that the earnings management around the debt-covenant violation is also done to improve the manager�s bargaining power in the renegotiation that follows the violation. Furthermore, I find no evidence of excessive earnings management by high-debt firms to stave off a violation, but I do find evidence that the Sarbanes�Oxley Act restrains managers from using accruals to stave off a violation. These results are based on examining 193,803 firm-quarters, 8,804 firms, and 2,035 new covenant violations spanning 1996 to 2007.