We investigate whether income smoothing affects the usefulness of earnings for contracting through the monitoring role of earnings-based debt covenants. First, we examine initial contract design and predict that income smoothing will increase (decrease) the use of earnings-based covenants if...

We investigate whether income smoothing affects the usefulness of earnings for contracting through the monitoring role of earnings-based debt covenants. First, we examine initial contract design and predict that income smoothing will increase (decrease) the use of earnings-based covenants if...

We examine whether lenders use analyst forecasts of the borrowing firm's earnings when establishing covenant thresholds in private debt contracts. We find greater proximity between the analysts' consensus earnings forecast and the future earnings performance required by the contract among...