Direct Evidence on the Informational Properties of Earnings in Loan Contracts
Using a sample of firms that disclose the realizations of earnings used for determining covenant compliance in loan contracts, we provide the first direct evidence on the informational properties of earnings used in the performance covenants included in debt contracts. We find that the earnings meas...
| Main Authors: | , , |
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| Format: | Article |
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Wiley Blackwell
2019
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| Online Access: | http://hdl.handle.net/1721.1/120753 https://orcid.org/0000-0002-2221-5198 |
| _version_ | 1811087343042428928 |
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| author | DYRENG, SCOTT D. VASHISHTHA, RAHUL Weber, Joseph P |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management DYRENG, SCOTT D. VASHISHTHA, RAHUL Weber, Joseph P |
| author_sort | DYRENG, SCOTT D. |
| collection | MIT |
| description | Using a sample of firms that disclose the realizations of earnings used for determining covenant compliance in loan contracts, we provide the first direct evidence on the informational properties of earnings used in the performance covenants included in debt contracts. We find that the earnings measure used in performance covenants does not exhibit asymmetric loss timeliness and has significantly greater cash flow predictive ability than GAAP measures of earnings. We suggest that these results reflect the idea that contracting parties design accounting rules for performance covenants to enhance their efficacy as “tripwires”. |
| first_indexed | 2024-09-23T13:44:34Z |
| format | Article |
| id | mit-1721.1/120753 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T13:44:34Z |
| publishDate | 2019 |
| publisher | Wiley Blackwell |
| record_format | dspace |
| spelling | mit-1721.1/1207532022-10-01T16:51:11Z Direct Evidence on the Informational Properties of Earnings in Loan Contracts DYRENG, SCOTT D. VASHISHTHA, RAHUL Weber, Joseph P Sloan School of Management Weber, Joseph P Using a sample of firms that disclose the realizations of earnings used for determining covenant compliance in loan contracts, we provide the first direct evidence on the informational properties of earnings used in the performance covenants included in debt contracts. We find that the earnings measure used in performance covenants does not exhibit asymmetric loss timeliness and has significantly greater cash flow predictive ability than GAAP measures of earnings. We suggest that these results reflect the idea that contracting parties design accounting rules for performance covenants to enhance their efficacy as “tripwires”. 2019-03-05T21:56:19Z 2019-03-05T21:56:19Z 2017-02 2016-08 2019-03-05T19:25:45Z Article http://purl.org/eprint/type/JournalArticle 0021-8456 1475-679x http://hdl.handle.net/1721.1/120753 Dyreng, Scott D., Rahul Vashishtha, and Joseph Weber. “Direct Evidence on the Informational Properties of Earnings in Loan Contracts.” Journal of Accounting Research 55, no. 2 (April 10, 2017): 371–406. doi:10.1111/1475-679x.12168. https://orcid.org/0000-0002-2221-5198 http://dx.doi.org/10.1111/1475-679X.12168 Journal of Accounting Research Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Wiley Blackwell Other repository |
| spellingShingle | DYRENG, SCOTT D. VASHISHTHA, RAHUL Weber, Joseph P Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title | Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title_full | Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title_fullStr | Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title_full_unstemmed | Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title_short | Direct Evidence on the Informational Properties of Earnings in Loan Contracts |
| title_sort | direct evidence on the informational properties of earnings in loan contracts |
| url | http://hdl.handle.net/1721.1/120753 https://orcid.org/0000-0002-2221-5198 |
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