The effect of the interest coverage covenants on classification shifting of revenues

Məlikov K., Coakley J., Manson S.

European Journal of Finance, vol.25, no.16, pp.1572-1590, 2019 (SSCI, Scopus) identifier

  • Nəşrin Növü: Article / Article
  • Cild: 25 Say: 16
  • Nəşr tarixi: 2019
  • Doi nömrəsi: 10.1080/1351847x.2019.1618888
  • jurnalın adı: European Journal of Finance
  • Jurnalın baxıldığı indekslər: Social Sciences Citation Index (SSCI), Scopus
  • Səhifə sayı: pp.1572-1590
  • Açar sözlər: Classification shifting of revenues, debt covenant violations, interest coverage covenant
  • Açıq Arxiv Kolleksiyası: Məqalə
  • Adres: Bəli

Qısa məlumat

While prior studies focus on real/accrual-based earnings management and expense misclassification to investigate earnings manipulation in avoiding covenant violations, this paper extends such research in a new direction. In particular, it examines whether firms employ classification shifting of revenues when they are subject to interest coverage EBITDA-based covenants close to their threshold values or limits. This earnings management tool allows firms to increase reported EBITDA by misclassifying non-operating revenues as operating revenues to remain within covenant limits that include EBITDA. Using a sample of 559 UK listed firm-years for the period 2005–2014, it establishes that the use of classification shifting of revenues is high when interest coverage covenants are close to their limits. Further analysis suggests that firms also employ revenue shifting when all their loan covenants are EBITDA-related.