Mandated accounting changes and debt covenants. The case of oil and gas accounting

Thomas Lys*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

63 Scopus citations

Abstract

The relationships among mandated accounting changes, bond covenants and security prices has been the focus of several studies. These studies have provided mixed evidence on the existence of a bond covenant effect on security prices. This paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt. Using an option pricing framework, it is shown that the debt to equity alone is not an adequate measure of default risk. In particular, both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change. These theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting.

Original languageEnglish (US)
Pages (from-to)39-65
Number of pages27
JournalJournal of Accounting and Economics
Volume6
Issue number1
DOIs
StatePublished - Jan 1 1984

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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