Accounting and non-accounting based information in the market for debt: Evidence from Australian private debt contracts

This paper examines accounting and non-accounting based restrictive covenants in Australian private debt agreements. With respect to the former, our findings differ from previous research on public debt. We find more varied definitions of constraints and their specified tightness in private debt contracts than in public debt contracts. Further, limits on interest cover are found to be continuing constraints and not 'once-off' limits. The paper reports frequent use of more specific or 'tailored' accounting based constraints and the frequent inclusion of off-balance sheet numbers in the measurement rules specified.
The paper also provides the first Australian evidence on the use of non-accounting based constraints. These are pervasive and cover a wide range of corporate activity. While largely consistent with previous research the paper also reports evidence of restrictions previously argued to be sub-optimal and hence, unlikely to be observed. Specifically, there are frequent restrictions on firms' production and investment policies.