This study documents that investors exercise their liquidation option on firms facing less severe financial distress than bankruptcy filings or negative earnings. Our sample is 124 firms which service their first time violation of debt covenants. We find that the valuation shift from earnings to book value of equity in the violation manifestation period is reversed in the post-violation recovery period. This suggests that the valuation distortion in the pre-violation period is temporary rather than permanent.
Department, Program, or Center
Cready, William; Karim, Khondkar; and Lim, Steve, "Debt covenant violation and the value relevance of accounting information" (2002). Accessed from
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