Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/70896
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Title: The role of audit verification in debt contracting : evidence from covenant violations
Authors: Jiang, LL 
Zhou, H
Issue Date: Mar-2017
Source: Review of accounting studies, Mar. 2017, v. 22, no. 1, p. 469-501
Abstract: We investigate the role of audit verification in the resolution process following debt covenant violations. Using two sets of proxies for demand-audit fees and the independence and diligence of audit committees-we find evidence that covenant violations result in a demand for differentially higher levels of audit verification. Further analyses demonstrate the link between the increased demand for audit verification and the mechanisms designed to control agency costs in debt contracts. We document cross-sectional variations in the observed fee differential with respect to the level of reliance on financial covenants, the type of covenants violated, and waiver decisions. Moreover, we find that the observed audit fee increases are associated with more favorable movements in borrowing costs and the adoption of more conservative investment policies post violation. Our findings suggest that covenant violations increase the demand for audit services to help control contracting costs post violation.
Keywords: Corporate governance
Auditormonitoring
Covenant violation
Audit committee
Publisher: Springer
Journal: Review of accounting studies 
ISSN: 1380-6653
EISSN: 1573-7136
DOI: 10.1007/s11142-016-9383-x
Rights: © Springer Science+Business Media New York 2017
This version of the article has been accepted for publication, after peer review (when applicable) and is subject to Springer Nature’s AM terms of use (https://www.springernature.com/gp/open-research/policies/accepted-manuscript-terms), but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: http://dx.doi.org/10.1007/s11142-016-9383-x.
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