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

Malikov, Kamran and Coakley, Jerry and Manson, Stuart (2019) 'The effect of the interest coverage covenants on classification shifting of revenues.' The European Journal of Finance. ISSN 1351-847X

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Abstract

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.

Item Type: Article
Uncontrolled Keywords: Classification shifting of revenues, interest coverage covenant, debt covenant violations
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Accounting Centre
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 23 May 2019 09:45
Last Modified: 23 May 2019 09:45
URI: http://repository.essex.ac.uk/id/eprint/24581

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