The Relationship between Earnings Management and Long-run Performance of Debt Covenant Violation

• Main Authors: Chien Hsien Chiu, 邱建賢
• Other Authors: Jane Raung Lin
• Format: Others
• Language: zh-TW
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/09595131155955381744

碩士 === 國立交通大學 === 財務金融研究所 === 96 === 　　As companies arrange their debt, no matter loans or bonds, the investors or the lender usually make some additional restrictive covenants that protect their right. When the borrowers default on these covenants, or when covenant violation happens, the lender has the authority to protect their right. This case happens whether the borrowers pay principle and interest on time or not. The earnings management means the managers choose judgment in financial reporting and in structuring transactions to change the financial reports, or to influence contractual outcomes that depend on reported accounting numbers. 　　In financial field, we do concern about how an event affect the investment value of a company. In this study we relate debt covenant violation, operational performance and stock performance. First of all, we find the evidence that covenant violation companies manipulate their earnings, which is support of literature. And we also observe an interesting situation that the DCA index of the year after covenant violation is minus. We conclude that compared to benchmark or matching firms, post performances of covenant violation companies in operation or stock are worse. Moreover, companies that manipulate earnings in the violation year perform worse. In other words, earnings management and post event performance are inverse related.