Accounting-Based Debt Covenant, Loan Renegotiation and Accounting Choice
Posted: 30 Jun 1997
Date Written: April 1997
Abstract
This paper studies the bank's decision on waiver of debt- covenant violations, loan renegotiation, and borrower's dividend policies and accounting choice. It delineates the conditions under which the borrower has an incentive to manipulate accounting information. This study describes a relationship between accounting choice, project value, and the debt covenant restrictions. It concludes that the accounting choice is not only affected by the fact that the debt covenant is going to be breached, but it is also affected by the project's current value. This paper also examines an optimal dividend policy for the borrower. It identifies two factors which affect the borrower's dividend policy: (1) the future marginal rate of return of the project and, (2) the expected costs of bankruptcy in the future periods.
JEL Classification: M41, M43, G35, G21
Suggested Citation: Suggested Citation