The effectiveness of accounting-based dividend covenants
By Paul M. Healy, K. Palepu. 2011
169 citations recorded by the source corpus.
Abstract Accounting-based dividend constraints in lending contracts are imperfect means of mitigating conflicts of interests between stockholders and bondholders since managers have flexibility to make accounting decisions to circumvent the covenants. This paper documents firms' accounting and dividend responses to an increase in the tightness of dividend constraints. Firms cut dividends and do not appear to make accounting changes to circumvent the dividend restriction. The magnitude of the dividend cut is proportional to the tightness of the dividend constraint. This suggests that accounting-based covenants are effective means for bondholders to restrict firmsś dividend policies.
Subfields: Accounting, Strategy and Management
View Paper: https://www.semanticscholar.org/paper/c8ca60d4e52fcaa97a911f9cf5ab181c369d341e
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In Accounting
In Strategy and Management
Citations in the corpus
- Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective (2016, unknown): “For example, Healy and Palepu (1990) provide evidence consistent with covenants serving as a bonding mechanism against manager/shareholder opportunism.”
- Debt Financing and Financial Flexibility Evidence from Proactive Leverage Increases (2012, unknown): “Consistent with prior literature (Healy and Palepu 1990; DeAngelo and DeAngelo 1990; DeAngelo, DeAngelo and Skinner 1994), this effectively assumes that the expected payout at time t is equal to the dividend paid during the prior year.”
- Auditor quality and earnings management: Singaporean evidence (2010, background): “Leverage is included as prior studies show that firms with a higher likelihood of violating debt agreements are more likely to have an incentive to engage in earnings management to increase earnings ( Healy and Palepu, 1990”