The Effect of Technical Default Cost on Discretionary Accounting Decisions
Issue Date
2014-08-16Author
HassabElnaby, Hassas R.
Mosebach, Janet
Mosebach, Michael
Whisenant, Scott
Publisher
Kaizen Publications
Type
Article
Article Version
Scholarly/refereed, author accepted manuscript
Metadata
Show full item recordAbstract
This study investigates whether the variation in the expected costs of technical default leads managers to manipulate earnings in periods prior to, as well as in, the year in which avoidance of technical default becomes unlikely. We argue that managers have private information about the expected costs and consequences of default and, prior to default, condition their decisions about accounting choice and discretion on these expectations. We provide evidence on the endogeneity of two forms of discretion in accounting choices in the context of testing the debt covenant hypothesis. We document that both forms of earnings management are associated with a lower cost of technical default. Our findings also suggest earnings management is less likely when the expected cost of technical default is low, and such decisions are associated with a lower default cost for firms that actually enter technical default.
Description
This is the author's final draft. Copyright 2014 Kaizen Publications.
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Citation
Hassabelnaby, Hassan R., Michael Mosebach, and Scott Whisenant. "The Effect of Technical Default Cost on Discretionary Accounting Decisions." SSRN Electronic Journal SSRN Journal (n.d.): pag 1-37. DOI:
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