RATING-BASED COVENANTS: AN ASSOCIATION ANALYSES WITH BOOK-TAX DIFFERENCES
DOI:
https://doi.org/10.22561/cvr.v30i3.5738Keywords:
Rating, Book-tax differences, CovenantsAbstract
Managers may be encouraged to solve issues that have a negative impact on ratings as they are relevant to a company’s cost of debt and credit options. Because the book-tax differences (BTDs) may affect ratings, they may also be impacted by rating covenants, as managers may make decisions that result in BTDs that favor the credit rating. This study aims to assess if the issuance of debt securities involving rating covenants is associated with changes in BTDs. The sample consists of Brazilian publicly traded companies listed on B3 (Brasil, Bolsa and Balcão) from 2000 through 2016. The tests for panel data were carried out with variation of BTD and its absolute values, also considering the periods preceding and post IFRS adoption IFRS. The findings showed that the issuance of debentures with rating covenant reduced the absolute values of BTDs and their variations only for the pre-IFRS period. This suggests that by understanding 1) significant variations in the BTDs as indicative of risk and uncertainty and 2) high BTDs as derived from result management, rating agencies may provide lower rating scores. Rating covenants can be assumed to be determinant of BTD in the pre-IFRS period, but not thereafter.
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