Document Type
Article
Publication Date
11-27-2023
Abstract
We examine the impact of covenant violation on corporate operational efficiency. Using an aggregate measure of operational efficiency developed by Demerjian et al. (Management Science, 58, 2012, 1229–1248), we provide strong empirical evidence that covenant violations hinder firms from achieving operational efficiency. Our finding is robust to alternative definitions of operational efficiency and various model specifications to address potential endogeneity issues. Further analyses show that lower operational efficiency is attributable to covenant-violating firms' under-investments in capital and labour. In addition, the negative effect of covenant violation on operational efficiency is not universally the same, and is less evident in violating firms with greater agency problems.
This article was published Open Access through the CCU Libraries Transformative Agreement Program. The article was first published in the journal Accounting & Finance: https://doi.org/10.1111/acfi.13204
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Recommended Citation
James, H.L., Wang, H. & Wang, Z. (2024) Covenant violation and operational efficiency. Accounting & Finance, 64, 1879–1920. Available from: https://doi.org/10.1111/acfi.13204. Available at https://digitalcommons.coastal.edu/finance-economics/4/