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.
Description
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made. © 2023 The Authors. Accounting & Finance published by John Wiley & Sons Australia, Ltd on behalf of Accounting and Finance Association of Australia and New Zealand.
Publisher
WILEY
Date of publication
2023
Language
english
Persistent identifier
http://hdl.handle.net/10950/4948
Document Type
Article
Recommended Citation
James, Hui Liang; Wang, Hongxia; and Wang, Zhimin, "Covenant violation and operational efficiency" (2023). Accounting, Finance & Business Law Faculty Publications and Presentations. Paper 12.
http://hdl.handle.net/10950/4948