ERROR: relation "aaa14_proceeding_action_tracker" does not exist LINE 1: INSERT INTO aaa14_proceeding_action_tracker(action_tracker_i... ^There was an unexpected database error.ERROR: relation "aaa14_proceeding_action_tracker" does not exist LINE 1: INSERT INTO aaa14_proceeding_action_tracker(action_tracker_i... ^There was an unexpected database error.AAA Western Region Meeting: Intangible Assets and Net-Worth Covenants: An Investigation of the Determinants and the Effect of Goodwill Impairments
Individual Submission Summary
Share...

Direct link:

Intangible Assets and Net-Worth Covenants: An Investigation of the Determinants and the Effect of Goodwill Impairments

Fri, April 25, 1:45 to 3:25pm, Hilton Salt Lake City Center, TBA

Abstract

This paper explores the determinants of a total-asset net-worth covenant and the effect of reporting of intangible assets on the inclusion of this covenant in debt contracts. To investigate the determinants of the inclusion of a total-asset net-worth covenant, I conduct both level and changes analyses on the association between this covenant and three characteristics of borrowers and lenders. Specifically, I find that debt contracts are more likely to include total-asset net-worth covenants when borrowers have higher debt to tangible assets ratio. This finding suggests that lenders view intangible assets as relevant to their interests when borrowing firms rely on intangible assets to make loan payments. I also find that when lenders have expertise in the borrowing firm’s industry or have a longer lending relationship with the firm a total-asset net-worth covenant is more likely to be included in debt contracts. These results suggest that lenders’ information background regarding intangible assets facilitates the use of intangible assets in debt covenants. To understand the relation between the reporting of intangible assets and the inclusion of a total-asset net-worth covenant, I examine the relation between this covenant and goodwill impairments and find that firms with this covenant take larger impairments after the contract activation than those with tangible net-worth covenants. Furthermore, I examine how lenders information background affect the above positive relation and find that find that lenders’ industry expertise enhances the positive association between goodwill impairments and total-asset net-worth covenants, which suggests that lenders’ industry expertise helps to better monitor the reporting of goodwill after the contract being in effect. This paper provides new evidence regarding the link between the use of intangible assets in debt covenants and the characteristics of borrowers and lenders, and new insights on the relation among lender characteristics, the reporting of goodwill and the use of intangible assets in debt covenants, thereby contributing to our understanding of the use of intangibles in debt contracting.

Author