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Debt covenant violations and corporate cost management

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  • Gu, Yuqi
  • Ouyang, Bo

Abstract

In this study, we examine whether and how debt covenant violations are related to corporate cost management, an important business operating decision. Our findings suggest that firms significantly reduce slack operating resources after debt covenant violations. Our cross-sectional tests indicate that this reduction in cost stickiness is more pronounced when creditor monitoring is stronger, and when empire building is more severe. Our evidence adds to the literature on determinants of corporate cost management and sheds new light on how creditors influence firm behavior.

Suggested Citation

  • Gu, Yuqi & Ouyang, Bo, 2024. "Debt covenant violations and corporate cost management," Advances in accounting, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:advacc:v:65:y:2024:i:c:s0882611024000270
    DOI: 10.1016/j.adiac.2024.100756
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    More about this item

    Keywords

    Creditor control rights; Cost stickiness; Debt covenant violation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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