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• Debt covenant violations change the dynamics of governance to the strength of creditors. • Creditor governance is more prominent after debt covenant violations when banks use control rights to influence firm policies. • We find that the complexity of firms’ 10-K filings increases after debt covenant violations. We examine how the information disclosure quality of mandatory disclosure changes in response to the strength of creditor governance. Creditor governance is more prominent after debt covenant violations when banks use control rights to influence firm policies. We find that the complexity of firms’ 10-K filings increases after debt covenant violations. Our cross-sectional analyses show that the change in complexity varies systematically with the strength of creditor influence and creditors’ incentive to obscure public information disclosure. Further tests show that the increased reporting complexity is detrimental to firm value and firm’s information environment. Our study demonstrates that creditor governance plays a crucial role in shaping the quality of mandatory information disclosure. We contribute to the literature by examining the impact of creditor governance on firm behavior.
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Gu et al. (2025) studied this question.
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