To read the full version of this content please select one of the options below:

Accounting Policy Changes and Debt Contracts

Steven C. Hall (Associate Professor of Accounting, Department of Accounting & Finance, College of Business and Technology, University of Nebraska at Kearney, Kearney, NE 68849, USA)
Laurie S. Swinney (Professor of Accounting, Department of Accounting & Finance, College of Business and Technology, University of Nebraska at Kearney, Kearney, NE 68849, USA)

Management Research News

ISSN: 0140-9174

Article publication date: 1 July 2004

Abstract

Prior research provides evidence that firms make accounting choices to avoid violation of debt covenant provisions and the resulting costs of technical default. We extend this research by asking why some firms refrain from making accounting policy changes when faced with costs of technical default. We considered two possible explanations. First, we hypothesise that these defaulting firms may lack the flexibility to make accounting changes. Second, we hypothesise that these defaulting firms may lack incentive to change accounting methods. Results confirm prior research and indicate that defaulting firms make more accounting changes than non‐defaulting firms. The decision by defaulting firms to change or not change accounting methods during the three years ending in the year of a technical default of debt covenants can be explained in part by the ability of the firm and by the incentives of the firm to make a change.

Keywords

Citation

Hall, S.C. and Swinney, L.S. (2004), "Accounting Policy Changes and Debt Contracts", Management Research News, Vol. 27 No. 7, pp. 34-48. https://doi.org/10.1108/01409170410784239

Publisher

:

Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited