| This dissertation consists of two essays. The first essay investigates how ex ante design of a debt contract incorporates an important managerial behavioral characteristic - overconfidence. The second essay focuses on the ex post consequence of debt contract design on financial reporting conservatism.;Specifically, in the first essay, my coauthors and I examine the influence of overconfidence, a managerial behavioral characteristic, on the design of a debt contract. We find that firms with overconfident CEOs face tighter restrictions on their ability to make future investments, acquisitions, and raise additional debt financing. These restrictions are partially mitigated when firms with overconfident CEOs have greater information transparency, better performance records, and greater investment opportunities. Interestingly, we find only weak evidence for the effects on cost of debt. Overall, our study highlights the role of debt covenants adapting to the effects of behavioral characteristics incremental to other firm and CEO specific factors documented in the prior literature.;In my second essay, I examine how covenant violations and the transfer of creditors' control rights impact financial reporting conservatism. Using a discontinuity analysis, I find that firms' financial reporting becomes more conservative immediately after covenant violations and this effect persists for at least eight quarters. Investigation of specific transactions (write-downs, goodwill impairment, restructuring and discontinued operations) corroborates the findings from a statistical conservatism model. The conservatism effect is more pronounced when creditors possess greater bargaining power, when firms' operations are more volatile, and when creditors put Chief Restructuring Officers in place. Moreover, firms with more conservative reporting after violations have a larger decline in subsequent capital expenditure, acquisition, and financing activities, but a greater improvement in operating performance. These results are consistent with implications of financial contracting theory that creditors acquire more information to verify the state of nature after covenant violations, and an improved information environment helps creditors exercise their control rights and promote efficient corporate governance. |
