We examine how the information disclosure quality of mandatory disclosure changes in response to the strength of creditor governance.
Creditor governance is more prominent after debt covenant violations when banks use the control rights to influence firm policies. We find that the complexity of firms’ 10-K filings increases after debt covenant violations. The result of the regression discontinuity design test provides causal evidence for our baseline regression.
Additional tests show that discretionary reporting complexity, but not innate reporting complexity, increase after debt covenant violations.
Our cross-sectional analyses show that the change in complexity varies systematically with the strength of creditor influence and shareholder governance.
Finally, we show that the comparability of financial statements also deteriorates after debt covenant violations.
Our evidence indicates that creditor governance has a significant impact on mandatory information disclosure quality, and we contribute to the literature examining the impact of creditor governance on firm behavior.
Jian Zhou is Lloyd Fujie / Deloitte Foundation Distinguished Professor of Accounting at the University of Hawaii at Manoa. He has published in top-tier journals in accounting, finance, and management.
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