Accounting Information, Corporate Governance and Debt Covenants: Egyptian Evidence

Abstract

Purpose – The purpose of this paper is to develop a new model for the effect of accounting information and corporate governance mechanisms on public and private debt covenants of firms listed on the Egyptian stock exchange. Design/methodology/approach – The paper uses the multiple regression model. This model includes three main variables of accounting information: change in net cash flows from operating activities, change in earnings before extraordinary items, and accounting disclosure levels. In addition, the model incorporates ten corporate governance mechanisms. The sample used in the current study consists of 66 observations of Egyptian firms that issued bonds or were granted bank loans in the period from 2003 through 2013. Findings – The paper concludes that the new model is useful in explaining the changes in the design of debt covenants. It finds that there is a significant negative relationship between accounting information and corporate governance mechanism on one side and price terms in the private debt contracts on the other side. There is a significant negative relationship between accounting information and corporate governance mechanism on one side and the non-price terms in the private debt contracts on the other side. There is a significant negative relationship between accounting information and corporate governance mechanism on one side and the price and non-price terms in private debt contracts on the other side. Practical implications – The findings have implications for lenders (banks and bondholders); through helping them in making credit decisions, as they rely on accounting information and corporate governance mechanisms when designing debt covenants that are imposed on public and private debt contracts. Originality/value – To the best of the authors’ knowledge, there are no Egyptian studies to date examining the effect of accounting information and corporate governance mechanisms on public and private debt covenants of firms listed on the Egyptian stock exchange. Consequently, this paper contributes to the limited literature by suggesting a new model for the effect of accounting information and corporate governance mechanisms on public and private debt covenants. Furthermore, this paper develops a new measure for non-price terms in debt contracts by creating a new index containing 109 terms of public and private debt covenants.