Accounting Theory Is The Debt Covenant - 1635 Words

(2) Debt covenant motives Another important hypothesis of accounting theory is the debt covenant hypothesis. The violation of the debt covenant implies, shows that the instability when company operates its business. Also, it means that there exists the volatility in major accounting measures, like earnings and liquidity, even though will increase the possibility of risk of a bankrupt (DeFond and Jiambalvo,1994). Furthermore, it also describes a negative company performance to public to make an impact on stock price, reliability as well as the reputation of the managers (Holthausen,Larcker Sloan, 1995). It is therefore the managers of a firm who have a lot of borrowing are more motivated to avoid the negative effects and manage earnings positively to ensure that they are abiding by their debt covenant. On the other hand, Sweeney (1994) found that so as to reduce the possibility of debt covenant violation, the managers are more likely to choose to engage in earnings management by using accruals to increase inco me. (3) political cost motives Due to the fact that the society and the market pays more attention on super large-scale enterprises, the earnings management becomes one of the methods to lessen the degree of attention. It can be found obviously from Jones(1991) research that during the investigating period of United States International Trade Commission, the firms under investigation are more motivated to adjust accrual incomes in financial statements than otherShow MoreRelatedEssay on Financial Accounting Theory1727 Words   |  7 Pagesï » ¿QUESTION 1 a. Outline the objective and the principles of a theory that prescribes fair value accounting. Fair value accounting is to measure selected assets at fair value. 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