Executive Takeaways
■ A new accounting standard in 2007, SFAS 160, mechanically relaxed certain covenant types. ■ Financially healthy firms with relaxed covenants borrowed more after SFAS 160. ■ These firms used their additional borrowings to fund legitimate investments. ■ This evidence shows that tight covenants restrict borrowing even before they are violated.
Sunay Mutlu, Assistant Professor of Accounting
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