Nonrecurring Items in Debt Contracts

Anne Beatty, Lin - Cheng, Tzachi Zach

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.

Original languageEnglish (US)
JournalContemporary Accounting Research
DOIs
StateAccepted/In press - Jan 1 2018

Fingerprint

Covenant
Debt contracts
Exclusion
Predictive ability
Contract design
Agency costs
Accounting information
Usefulness
Debt contracting
Agency costs of debt

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Nonrecurring Items in Debt Contracts. / Beatty, Anne; Cheng, Lin -; Zach, Tzachi.

In: Contemporary Accounting Research, 01.01.2018.

Research output: Contribution to journalArticle

@article{4a7efe528d95408293d1116bca58e7aa,
title = "Nonrecurring Items in Debt Contracts",
abstract = "Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.",
author = "Anne Beatty and Cheng, {Lin -} and Tzachi Zach",
year = "2018",
month = "1",
day = "1",
doi = "10.1111/1911-3846.12426",
language = "English (US)",
journal = "Contemporary Accounting Research",
issn = "0823-9150",
publisher = "Wiley-Blackwell",

}

TY - JOUR

T1 - Nonrecurring Items in Debt Contracts

AU - Beatty, Anne

AU - Cheng, Lin -

AU - Zach, Tzachi

PY - 2018/1/1

Y1 - 2018/1/1

N2 - Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.

AB - Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.

UR - http://www.scopus.com/inward/record.url?scp=85058342237&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85058342237&partnerID=8YFLogxK

U2 - 10.1111/1911-3846.12426

DO - 10.1111/1911-3846.12426

M3 - Article

AN - SCOPUS:85058342237

JO - Contemporary Accounting Research

JF - Contemporary Accounting Research

SN - 0823-9150

ER -