Earnings Quality And Debt Covenant

Banks are important financial institutions that allocate financial resource. After the financial crisis, more than100banks around the world suffered bankruptcy. A serious decline happened in the performance of the major banks in the world. How to manage the bank’s risk is a common problem to banks and governments. The main purpose of financial reporting is providing information about the surplus and its composition. In China, the surplus data has more irreplaceable position. Accounting earnings are critical in the decision-making of listed companies, investors, regulators.However, the quality of accounting information in China, especially the long-term earning information can not be guaranteed. Inflating net profit, earnings information fraud issues all the time. In view of this situation, if the bank decision makers could identify the debtor’s earnings quality differences, they will be able to take actions based on the information. They could take appropriate measures to manage credit risks; otherwise the bank may have to face a greater risk of default.A lot of research about debt covenants such as earnings quality and cost of debt have been done by scholars at home and abroad. However, there is no unified conclusion. This article analysis the economic consequences of earnings quality debt covenants from three angles (debt defaulting, the cost of debt, debt maturity structure). In order to study the impact of accounting earnings quality, we use a combination of research methods in the theory of literature and empirical analysis. The entire analysis is built on the basis of information asymmetries and principal-agent theory. The literature review is divided into three parts:the surplus and earnings quality literature; the debt covenants literature, creditor protection related literature. Empirical test is divided into two levels:the first level inspect earnings quality forecasts for breach of contract. The second level is divided into two empirical tests; inspect the significance of earnings quality to the debtor. In the empirical test section, the article select all A-share listed companies report data from2007to2011, a total of5412study sample. Discuss how the earnings quality forecast debt default, how does it influence the cost of debt and the debt maturity structure. Eventually get three main conclusions:①The higher quality of earnings information, the lower the likelihood of defaulting on its debt. It also shows that before the loan, our bank couldn’t identify surplus quality.②The higher quality of earnings information, the lower cost of debt the company enjoyed. In the process of signing of the debt covenants, the creditors protect their own interests by adjusting the cost of debt. They charge a credit risk premium to corporate whose default risk is high. Also shows that in the duration of loans, the banks are able to identify the earnings quality.③The higher quality of earnings information, the longer-term debt the company could enjoy. The creditors protect their own interests by adjusting the maturity structure of debt to relief agency conflict.The text is divided into seven main sections; the first chapter is an introduction to this part of the article about the research background, theoretical and practical significance. And describe the main innovations and the main structure of this article. The second part is the introduction of the literature review and related theoretical analysis. This chapter first summarizes the definition of surplus and several characteristics of earnings quality, followed by a description of the information asymmetry which brings the conflict of debt covenants, and summarizes several forms of contractual conflicts. Finally, the chapter discussed ways of creditor protection as well as the Chinese environment of creditor protection. The third part shows the process of measurement of earnings quality and sample. The fourth part is the earnings quality and debt delinquencies. This chapter mainly discusses if earnings quality could help to make the right judgment of creditor default risk on debt covenants. The decision usefulness of earnings information is reflected in the predictive role of earnings information. The fifth part is earnings quality and the cost of deb. This chapter mainly shows the significance of earnings quality on protecting its creditors. The sixth part is the earnings quality and maturity structure of debt. This chapter mainly discusses how the earnings quality influences debt maturity structure. The seventh part is the study conclusion. Summarizes the main conclusions we draw, earnings quality is of great significance for bank credit decisions. This part pointed out the limitation of this article. The article is based on the theoretical analysis and confirmed by empirical evidence:analysis of earnings information for creditors can optimize their credit decisions. The same time, in terms of the regulatory authorities, the effective creditor protection of the environment can reduce the agency costs of debt. This article wants to provide theoretical and empirical evidence to support the regulatory authorities to formulate relevant policies.The innovation of this article:first, the concern about banks start from the information before entering into debt covenants.The article concerns all the process of debt covenants. Second, this study added how the earnings quality influence the default forecast and debt maturity structure. Third, this article select the point of view of the demand for earnings quality,studying the significance of earnings quality for the creditors.In this paper, there are also deficiencies:First, this measure of earnings quality did not consider the motives of earnings management (additional allotment, stock price, tax planning, to avoid being sketchy ST, salary considerations, etc.). Second, the impact of the debt covenants contains complex factors, many factors are not taken into account. Such as the cooperation between banks and enterprises, whether there is a greater motive for the initial loans of enterprises of earnings management? Finally, for the variable metric, some measurement error may exist.