AN EXAMINATION OF DEBT-EQUITY PROXIES VS. ACTUAL DEBT COVENANT RESTRICTIONS IN ACCOUNTING CHOICE STUDIES

A study empirically examines the relative performance of the debt-to-equity ratio versus measures of the actual existence and tightness of accounting-based restrictive debt covenant provisions. Actual debt covenant data is incorporated into a previously published study of inventory method choice in which the debt-to-equity proxy was used to make inferences with respect to the effect of restrictive covenants on the LIFO adoption decision. The results show that the existence and tightness of covenant provisions are related to inventory method choice, and suggest that the debt-to-equity ratio may be proxying for variables other than covenant-related provisions.