IDEAS home Printed from https://ideas.repec.org/a/jfr/ijfr11/v11y2020i4p537-545.html
   My bibliography  Save this article

Debt Covenants and Accounting Conservatism

Author

Listed:
  • Adamu Pantamee Abdurrahman
  • Shafi Mohamad
  • Ooi Chee Keong
  • Syed Ehsanullah

Abstract

The purpose of this study is to examine the association between debt covenants and accounting conservatism. The study uses the data of 180 non-financial listed companies on the Malaysian Stock Exchange during the period of 2008 to 2018. Our findings suggest that the increasing use of debt covenants automatically gears up the firm to focus on the timely recognition of loss in order to satisfy the debt market. Further, we also examine whether there is a relationship between those firms¡¯ that are more dependent on debt covenants and timely recognition of losses. This study finds that as the firm depends more on covenants their emphasis on the timely recognition of economic loss increases to avoid potential debt market issues. We also discuss the transfer of controls and power to the bondholders in a situation of financial distress and the auditor¡¯s responsibility to monitor the limitations of accounting conservatism.

Suggested Citation

  • Adamu Pantamee Abdurrahman & Shafi Mohamad & Ooi Chee Keong & Syed Ehsanullah, 2020. "Debt Covenants and Accounting Conservatism," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 537-545, July.
    • Handle: RePEc:jfr:ijfr11:v:11:y:2020:i:4:p:537-545
    DOI: 10.5430/ijfr.v11n4p537
    as

    Download full text from publisher

    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/18419/11306
    Download Restriction: no
    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/18419
    Download Restriction: no
    File URL: https://libkey.io/10.5430/ijfr.v11n4p537?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Wang, Haiping & Zhang, Jing, 2017. "Fair value accounting and corporate debt structure," Advances in accounting, Elsevier, vol. 37(C), pages 46-57.
    2. Inder K. Khurana & Changjiang Wang, 2015. "Debt Maturity Structure and Accounting Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 167-203, January.
    3. Ruch, George W. & Taylor, Gary, 2015. "Accounting conservatism: A review of the literature," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 17-38.
    4. Valeri V. Nikolaev, 2010. "Debt Covenants and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 137-176, March.
    5. Valeri V. Nikolaev, 2010. "Debt Covenants and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 51-89, March.
    6. Mulherin, J. Harold & Netter, Jeffry M. & Poulsen, Annette B., 2018. "Observations on research and publishing from nineteen years as editors of the Journal of Corporate Finance," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 120-124.
    7. Karthik Balakrishnan & Ross Watts & Luo Zuo, 2016. "The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(5-6), pages 513-542, May.
    8. Hans B. Christensen & Valeri V. Nikolaev & Regina Wittenberg‐Moerman, 2016. "Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 397-435, May.
    9. Chengru Hu & Wei Jiang, 2019. "Managerial risk incentives and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 52(3), pages 781-813, April.
    10. Andreas Charitou & Irene Karamanou & Anastasia Kopita, 2018. "The determinants and valuation effects of classification choice on the statement of cash flows," Accounting and Business Research, Taylor & Francis Journals, vol. 48(6), pages 613-650, September.
    11. Jeffrey L. Callen & Feng Chen & Yiwei Dou & Baohua Xin, 2016. "Accounting Conservatism and Performance Covenants: A Signaling Approach," Contemporary Accounting Research, John Wiley & Sons, vol. 33(3), pages 961-988, September.
    12. Yuxiang Zhong & Wanli Li, 2017. "Accounting Conservatism: A Literature Review," Australian Accounting Review, CPA Australia, vol. 27(2), pages 195-213, June.
    13. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2016. "Accounting conservatism and firm investment efficiency," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 221-238.
    14. Yuying Xie, 2015. "Confusion over Accounting Conservatism: A Critical Review," Australian Accounting Review, CPA Australia, vol. 25(2), pages 204-216, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Čičak Josip & Vašiček Davor, 2019. "Determining the Level of Accounting Conservatism through the Fuzzy Logic System," Business Systems Research, Sciendo, vol. 10(1), pages 88-101, April.
    2. Tri Tri Nguyen & Chau Minh Duong & Nguyet Thi Minh Nguyen & Hung Quang Bui, 2020. "Accounting conservatism and banking expertise on board of directors," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 501-539, August.
    3. Chy, Mahfuz & De Franco, Gus & Su, Barbara, 2021. "The effect of auditor litigation risk on clients' access to bank debt: Evidence from a quasi-experiment," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    4. Dan Zhang & Shiguang Ma & Xiaofei Pan, 2023. "How do institutional investors influence accounting conservatism in China?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S2), pages 2719-2754, June.
    5. Zhang, Xinyue & Zhong, Yuxiang & Li, Wanli, 2022. "The effect of borrowers' accounting conservatism on lenders' loan loss provisions: Evidence from China's banking industry," International Review of Financial Analysis, Elsevier, vol. 82(C).
    6. Laux, Christian & Laux, Volker, 2024. "Accounting conservatism and managerial information acquisition," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    7. Khalifa, Mariem & Trabelsi, Samir & Matoussi, Hamadi, 2022. "Leverage, R&D expenditures, and accounting conservatism: Evidence from technology firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 285-304.
    8. Carlo D'Augusta & Matthew D. DeAngelis, 2020. "Does Accounting Conservatism Discipline Qualitative Disclosure? Evidence From Tone Management in the MD&A," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2287-2318, December.
    9. Cerqueira Antonio & Pereira Claudia, 2020. "The Effect of Economic Conditions on Accounting Conservatism under IFRS in Europe," Review of Economic Perspectives, Sciendo, vol. 20(2), pages 137-169, June.
    10. Ha, Joohyung, 2019. "Agency costs of free cash flow and conditional conservatism," Advances in accounting, Elsevier, vol. 46(C), pages 1-1.
    11. Rui Wang, 2021. "The attention of long‐term institutional investors and timely loss recognition," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1596-1629, October.
    12. Kim, Jaewoo, 2018. "Asymmetric timely loss recognition, adverse shocks to external capital, and underinvestment: Evidence from the collapse of the junk bond market," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 148-168.
    13. Barbara Su, 2023. "Banking practices and borrowing firms’ financial reporting quality: evidence from bank cross-selling," Review of Accounting Studies, Springer, vol. 28(1), pages 201-236, March.
    14. Daniel Cohen & Bin Li & Ningzhong Li & Yun Lou, 2022. "Major government customers and loan contract terms," Review of Accounting Studies, Springer, vol. 27(1), pages 275-312, March.
    15. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E. & Voulgaris, Georgios, 2021. "Accounting conservatism and corporate social responsibility," The British Accounting Review, Elsevier, vol. 53(4).
    16. Inder K. Khurana & Wei Wang, 2019. "International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 57(1), pages 241-290, March.
    17. Takuma Kochiyama & Ryosuke Nakamura, 2021. "Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 305-334, March.
    18. Dmitri Byzalov & Sudipta Basu, 2016. "Conditional conservatism and disaggregated bad news indicators in accrual models," Review of Accounting Studies, Springer, vol. 21(3), pages 859-897, September.
    19. Zhiming Ma & Derrald Stice & Christopher Williams, 2022. "What's my style? Supply‐side determinants of debt covenant inclusion," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 461-490, March.
    20. Araceli Mora & Martin Walker, 2015. "The implications of research on accounting conservatism for accounting standard setting," Accounting and Business Research, Taylor & Francis Journals, vol. 45(5), pages 620-650, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jfr:ijfr11:v:11:y:2020:i:4:p:537-545. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gina Perry (email available below). General contact details of provider: http://ijfr.sciedupress.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.