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| Author: | Demerjian, P.R. |
| Title: | Accounting standards and debt covenants: has the "balance sheet approach" led to a decline in the use of balance sheet covenants? |
| Journal: | Journal of Accounting & Economics
2011 : NOV, VOL. 52:2-3, p. 178-202 |
| Index terms: | debt accounting standards balance sheets financial institutions regulations |
| Language: | eng |
| Abstract: | In recent years, a sharp decline has been witnessed in the use of balance sheet-based covenants in private debt contracts. I hypothesize that changes in accounting standards may partly explain this decline. Standard setting has shifted towards a “balance sheet approach”, which I predict has worsened the balance sheet's usefulness for contracting. I measure the impact of the balance sheet approach on specific borrowers using a volatility ratio and find that borrowers with greater volatility ratios less likely have balance sheet-based covenants. This is consistent with reductions in the contracting usefulness of the balance sheet being linked with reductions in balance sheet covenants. |
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