ACCOUNTING-BASED CONSTRAINTS IN PUBLIC AND PRIVATE DEBT AGREEMENTS - THEIR ASSOCIATION WITH LEVERAGE AND IMPACT ON ACCOUNTING CHOICE

For a random sample of 83 firms, we show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's. For firms with accounting constraints, measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage. We incorporate constraint-related data into Zmijewski and Hagerman's (1981) income strategy model. Both a leverage constraint indicator and leverage are significantly associated with accounting choice. This suggests that leverage is proxying for factors in addition to the existence of accounting-based constraints. © 1990.