The Impact of IFRS on the Use of Private Debt Covenants: International Evidence

We investigate changes to the use of private debt covenants following the mandatory adoption of IFRS globally. Using a difference-in-differences specification, we find a significant decrease in accounting-based debt covenants (mainly balance sheet covenants) in IFRS-adopting countries after IFRS adoption, but not in non-IFRS countries. The post-IFRS decrease in accounting-based debt covenants is greater in countries with low creditor rights or with high depth of credit information sharing. The decreases are greater in countries with high enforcement and/or large differences between IFRS and local GAAP. In contrast, the use of nonaccounting covenants does not change but other loan conditions tighten after IFRS adoption. IFRS also leads to increased technical violations of accounting-based debt covenants. Overall, our findings are consistent with IFRS reducing contractibility.