Evidence of the impact of mandatory changes in accounting principles on corporate loan agreements |
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Authors: | Richard Leftwich |
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Institution: | The University of Chicago, Chicago, IL 60637, USA |
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Abstract: | The Theory in this paper predicts that mandatory changes in accounting princples can affect the measurement rules defined in restrictive covenants in firms' lending agreements. Consequently, those mandatory changes can have an impact on the value of a firm's equity, even if the changes appear to be merely ‘cosmetic’. This contracting cost theory is tested by examining of both event-related and cross-sectional abnormal performance of the equity of a sample of firms when the Accounting Princples Board changes accounting princples for business combinations. The theory provides, at best, in incomplete explanation of the observed abnormal performance. |
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