Journal articles: 'Debt Contracting'

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AKINS, BRIAN, DAVID DE ANGELIS, and MACLEAN GAULIN. "Debt Contracting on Management." Journal of Finance 75, no. 4 (March 13, 2020): 2095–137. http://dx.doi.org/10.1111/jofi.12893.

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Bharath, Sreedhar T., Jayanthi Sunder, and Shyam V. Sunder. "Accounting Quality and Debt Contracting." Accounting Review 83, no. 1 (January 1, 2008): 1–28. http://dx.doi.org/10.2308/accr.2008.83.1.1.

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We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt, i.e., bank loans. This is consistent with banks possessing superior information access and processing abilities that reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. In the case of private debt, since there is greater recontracting flexibility, both the price (i.e., interest) and non-price (i.e., maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality.

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Cotter, Julie. "Asset Revaluations and Debt Contracting." Abacus 35, no. 3 (October 1999): 268–85. http://dx.doi.org/10.1111/1467-6281.00046.

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Sunder, Jayanthi, Shyam V. Sunder, and Jingjing Zhang. "Balance Sheet Conservatism and Debt Contracting." Contemporary Accounting Research 35, no. 1 (February 8, 2018): 494–524. http://dx.doi.org/10.1111/1911-3846.12356.

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Yang, Ziyun. "Customer concentration, relationship, and debt contracting." Journal of Applied Accounting Research 18, no. 2 (May 8, 2017): 185–207. http://dx.doi.org/10.1108/jaar-04-2016-0041.

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Purpose The purpose of this paper is to examine the effect of a firm’s customer base concentration on its loan contract terms and how this effect varies with the strength of its customer relationship. Design/methodology/approach This study is an archival research based on a sample of US public firms that have loan contract data between 1990 and 2008. Major customer sales data are used to construct customer concentration and customer relationship measures. A debt contract model is employed to relate loan spread and other contract terms to customer concentration and relationship. Findings This study finds that firms with more concentrated customer bases have higher loan spread and shorter loan maturity and are more likely to issue secured loans. These negative effects disappear when the supplier firm maintains strong relationship with its customers. Research limitations/implications Additional forward-looking measure of customer relationship could benefit future research. Practical implications A firm’s customer base characteristics can have significant impacts on the terms of its loan contracts. Findings from this study support the notion that customer relationship is an important intangible asset that is informative to stakeholders of the firm. Originality/value This study proposes a new measure of customer relationship based on the past repeated relationships between a firm and its major customers. It shows that customer characteristics may affect firms’ contracts with creditors: customer base concentration increases credit risk whereas strong customer relationship improves credit quality.

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Deng, Saiying, Vincent J. Intintoli, and Andrew Zhang. "CEO Turnover, Information Uncertainty, and Debt Contracting." Quarterly Journal of Finance 09, no. 02 (March 25, 2019): 1950001. http://dx.doi.org/10.1142/s2010139219500010.

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CEO turnovers are important corporate events that can lead to significant changes within the firm. We find that CEO departures are associated with a subsequent increase in bank loan financing. The negative effect that CEO departures have on borrowing costs is largely driven by forced CEO turnovers. Following such departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to matched non-turnover and voluntary turnover firms. Evidence suggests that asset substitution and changes in accounting information quality help to explain the observed worsened terms following forced dismissals. On the other hand, more traditional voluntary departures are unrelated to changes in price and non-price loan terms.

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Fluck, Zsuzsanna. "Optimal Financial Contracting: Debt versus Outside Equity." Review of Financial Studies 11, no. 2 (April 1998): 383–418. http://dx.doi.org/10.1093/rfs/11.2.383.

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Hillier, David, Beatriz Martínez, Pankaj C. Patel, Julio Pindado, and Ignacio Requejo. "Pound of Flesh? Debt Contract Strictness and Family Firms." Entrepreneurship Theory and Practice 42, no. 2 (December 26, 2017): 259–82. http://dx.doi.org/10.1177/1042258717748933.

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While past work finds support for both higher and lower cost of debt among family firms, whether lower shareholder–creditor agency conflicts in family firms translate into greater ex-ante contracting efficiency (i.e., lower debt contract strictness) remains unexplored. Drawing on a shareholder–creditor agency framework and costly contracting theory, creditors, expecting firm value maximization rather than shareholder value maximization from family firms, may offer less strict debt contracts to increase contracting efficiency. We find in a sample of 716 publicly traded U.S. firms (2001–2010) that family firms have less strict debt contracts, which are even less strict when family firms have higher asset tangibility. Although increases in R&D investments could lead to more pronounced shareholder–creditor agency conflicts, given family firms' preferences for lower risk and growth, debt contract strictness among family firms is not positively associated with higher R&D intensity.

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Beatty, Anne, and Joseph Weber. "The Effects of Debt Contracting on Voluntary Accounting Method Changes." Accounting Review 78, no. 1 (January 1, 2003): 119–42. http://dx.doi.org/10.2308/accr.2003.78.1.119.

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This study examines whether the provisions of a firm's bank debt contracts affect its accounting choices. Starting with a sample of firms who have bank debt and who also voluntarily changed accounting methods, we investigate whether the likelihood that the change in accounting method increased (rather than decreased) the borrower's income depends on (1) whether the change in accounting method affects the bank debt contract calculations, (2) the expected costs of violating the bank debt covenants, (3) whether performance pricing provisions affect the interest rate on the loan, and (4) whether the bank debt contract contains accounting-based dividend restrictions. After controlling for other motives for changing accounting methods, we find that borrowers whose bank debt contracts allow accounting method changes to affect contact calculations are more likely to make income-increasing rather than income-decreasing changes. This increase in likelihood of an income-increasing change is attenuated when expected costs of technical violation are lower because there is a single lender, and occurs for borrowers whose debt contacts have performance pricing and dividend restrictions. These results suggest that incentives to lower interest rates through performance pricing or to retain dividend payment flexibility influence borrowers' accounting method choices, thereby addressing the fundamental questions posed by Fields et al. (2001) of whether, under what circumstances, and how accounting choice matters.

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Husain, Aasim M., John A. Carlson, and Jeffrey A. Zimmerman. "Debt Reduction and New Loans: A Contracting Perspective." IMF Working Papers 97, no. 95 (1997): 1. http://dx.doi.org/10.5089/9781451851786.001.

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Penalva, Fernando, and Alfred Wagenhofer. "Conservatism in debt contracting: theory and empirical evidence." Accounting and Business Research 49, no. 6 (June 13, 2019): 619–47. http://dx.doi.org/10.1080/00014788.2019.1609899.

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Lee, Hye Seung (Grace), and Logan B. Steele. "Debt Structure and Conditional Conservatism." Journal of Financial Reporting 4, no. 2 (September 2019): 115–40. http://dx.doi.org/10.2308/jfir-52558.

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We investigate whether characteristics of firms' debt structure, beyond leverage and debt covenants, are associated with predictable variation in conditional conservatism. The contracting theory of conservatism holds that conditional conservatism is an efficient mechanism employed by an organization to address agency conflict arising from contracts with various parties. For firms with contracts that are associated with more agency conflict, the potential benefit of a conservative reporting strategy should increase. We examine the following debt contract characteristics: (1) convertibility, (2) securitization, (3) seniority, and (4) placement. We find that debt types thought to be associated with a downward shift in agency conflict (convertible, secured, senior, and private debt) are associated with less conservative reporting. Our evidence supports contracting theory as being descriptive of the link between debt and conservatism. Also, our evidence corroborates the assertion that debt contract modifications do not fully resolve lenders' demands for conservative reporting. JEL Classifications: M41; D21; D82; G14.

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Baldwin, K. M. "Comments on Classical Papers." Journal of Applied Physiology 99, no. 4 (October 2005): 1241–42. http://dx.doi.org/10.1152/classicessays.00036.2005.

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This essay looks at the historical significance of one APS classic paper that is freely available online: Margaria R, Edwards HT, and Dill DB. The possible mechanisms of contracting and paying the oxygen debt and the role of lactic acid in muscular contraction. Am J Physiol 106: 689–715, 1933 ( http://ajplegacy.physiology.org/cgi/reprint/106/3/689 ).

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Sousa Paiva, Inna. "Contracting debt and the quality of financial reporting in private firms." Contaduría y Administración 63, no. 2 (April 10, 2018): 37. http://dx.doi.org/10.22201/fca.24488410e.2018.1663.

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<p class="Default"><span lang="EN-US">This study investigates whether the quality of firms’ financial reporting is influenced by the contracting of debt, using data on Portuguese private firms from 2013 to 2015. More specifically, the study uses earnings smoothing, magnitude of absolute discretionary accruals, and timeliness of disclosure as proxies for financial reporting quality. I find that private firms which contract more debt exhibit higher levels of financial reporting quality. Additionally, firms that contract larger amounts of debt and with a good financial performance tend to exhibit lower quality financial reporting. The results provide strong evidence that private firms have an interest in camouflaging their performance in the presence of higher levels of bank debt. </span></p>

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Bizjak, John M., Swaminathan L. Kalpathy, and Vassil T. Mihov. "Performance Contingencies in CEO Equity Awards and Debt Contracting." Accounting Review 94, no. 5 (November 1, 2018): 57–82. http://dx.doi.org/10.2308/accr-52317.

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ABSTRACT We find that firms that grant performance-contingent (p-c) equity awards with accounting-based vesting conditions to their CEOs have lower cost of debt and less restrictive loan terms. The benefits of p-c accounting-based awards on debt financing are greater when the moral hazard problem faced by debtholders is potentially more significant—for example, for firms with poorer credit ratings and lower asset tangibility. We find some evidence that certain types of p-c equity awards with stock price-based conditions increase the cost of debt financing. The adoption of p-c accounting-based awards increases firm value, as indicated by stock and bond event studies. Overall, our findings suggest that the incentive compatibility of accounting-based p-c awards mitigates the potential agency conflict between shareholders and debtholders. JEL Classifications: G32; G34; J33; M12; M52.

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Tung, Samuel S., and Jerry J. Weygandt. "The Determinants of Timing in the Adoption of New Accounting Standards: A Study of SFAS No. 87, Employers' Accounting for Pensions." Journal of Accounting, Auditing & Finance 9, no. 2 (April 1994): 325–37. http://dx.doi.org/10.1177/0148558x9400900212.

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This study examines whether debt contracting and political costs influence companies' decisions regarding the timing of the initial adoption of Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions. The results are consistent with the debt contracting hypotheses: early adopters tended to have higher leverage and a higher income effect from the adoption and a lower interest coverage ratio and a larger increase in this ratio from the adoption. Our findings, however, do not support the political cost hypothesis.

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Liu, Hui, Charles P. Cullinan, and Junrui Zhang. "Modified audit opinions and debt contracting: evidence from China." Asia-Pacific Journal of Accounting & Economics 27, no. 2 (September 10, 2018): 218–41. http://dx.doi.org/10.1080/16081625.2018.1517048.

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Li, Shihong. "SOX 404 and debt contracting value of accounting information." International Journal of Accounting & Information Management 26, no. 3 (August 6, 2018): 384–412. http://dx.doi.org/10.1108/ijaim-03-2017-0042.

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Purpose This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans. Design/methodology/approach The study uses a sample of 1,173 US-listed firms that issued syndicated loans both before and after their compliance with SOX 404 to analyze the changes in loan spread’s sensitivity to some key accounting metrics such as ROA, interest coverage, leverage and net worth. Findings The study finds that the interest spread’s sensitivity to key accounting metrics, most noticeably for ROA, declined following the borrower’s compliance with the requirements of SOX 404. The decline was not explainable by borrowers that disclosed internal control weaknesses but concentrated among borrowers suspected of real earnings management (REM). Originality/value By examining the effects of SOX 404 on banks’ pricing process, this study augments the literature on SOX’s economic consequences. The findings suggest that lenders perceive little new information from SOX 404 disclosures of internal control deficiencies and are cautious about the accounting information provided by REM borrowers. It also extends the research on the use of accounting information in debt contracting. By examining loan interest’s sensitivity to accounting metrics, it broadens the concept of debt contracting value of accounting information to include accounting’s usefulness for assessing credit risk at loan inception.

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Chen, Peter F., Shaohua He, Zhiming Ma, and Derrald Stice. "The information role of audit opinions in debt contracting." Journal of Accounting and Economics 61, no. 1 (February 2016): 121–44. http://dx.doi.org/10.1016/j.jacceco.2015.04.002.

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Day, Judy F., Paul R. Mather, and Peter Taylor. "The effect of corporate board characteristics on loan monitoring decisions." Corporate Ownership and Control 11, no. 2 (2014): 46–59. http://dx.doi.org/10.22495/cocv11i2p4.

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Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. A two-way interaction between financial expertise and board independence is also documented. Since likelihood of debt covenant breaches continues to be an important variable in studies of accounting choice and corporate finance the paper provides insights into associated debt contracting costs and their determinants. Apart from extending the academic literature, this study provides additional evidence on the efficacy of good corporate governance in reducing debt contracting costs that should also be of interest to regulators and practitioners

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Kale, Jayant R., Costanza Meneghetti, and Husayn Shahrur. "Contracting with Nonfinancial Stakeholders and Corporate Capital Structure: The Case of Product Warranties." Journal of Financial and Quantitative Analysis 48, no. 3 (June 2013): 699–727. http://dx.doi.org/10.1017/s002210901300029x.

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AbstractWe investigate the relation between a firm’s product warranty level and its leverage. We find that leverage relates negatively to the warranty level and that this relation is robust to controls for endogeneity and self-selection into offering warranties. The negative warranty-leverage relation obtains only in the subsample of firms in the manufacturing industries. We also show that firms with warranties have the lowest debt levels, firms without warranties but operating in industries where other firms offer warranties on average carry higher debt, and firms in industries where no firm offers a warranty have the highest debt levels.

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CHRISTENSEN, HANS B., EDWARD LEE, and MARTIN WALKER. "Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting." Journal of Accounting Research 47, no. 5 (December 2009): 1167–99. http://dx.doi.org/10.1111/j.1475-679x.2009.00345.x.

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Chen, Zhihong, Ningzhong Li, and Jianghua Shen. "Litigation Risk and Debt Contracting: Evidence from a Natural Experiment." Journal of Law and Economics 63, no. 4 (November 1, 2020): 595–630. http://dx.doi.org/10.1086/708735.

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Taylor, Peter. "What do we know about the role of financial reporting in debt contracting and debt covenants?" Accounting and Business Research 43, no. 4 (August 2013): 386–417. http://dx.doi.org/10.1080/00014788.2013.798551.

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Kang, Tony, Gerald J. Lobo, and Michael C. Wolfe. "Accounting Conservatism and Firm Growth Financed by External Debt." Journal of Accounting, Auditing & Finance 32, no. 2 (July 27, 2016): 182–208. http://dx.doi.org/10.1177/0148558x15585236.

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Previous research shows that accounting conservatism facilitates debt contracting. Extending this line of literature, we examine whether the role of accounting conservatism in accessing external debt to attain firm growth varies with its maturity. We find evidence of a positive relationship between conservatism and debt maturity. We also observe a positive relationship between conservative accounting and future growth funded by all classes of debt, but this relation is due to long-term rather than short-term debt, which is less prone to agency risk. Furthermore, the associations between conservatism and debt maturity and conservatism and growth financed by long-term debt are mostly observed for firms with fewer anti-takeover provisions in place. These findings suggest that the demand for accounting conservatism is not uniform across different debt maturity horizons.

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Baber, William R., and Angela K. Gore. "Consequences of GAAP Disclosure Regulation: Evidence from Municipal Debt Issues." Accounting Review 83, no. 3 (May 1, 2008): 565–92. http://dx.doi.org/10.2308/accr.2008.83.3.565.

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We compare characteristics of municipal debt issues in states that mandate GAAP for municipalities with issues in states that impose no annual financial disclosure requirements. Cross-sectional comparisons indicate that the use of public (versus private) debt is greater, and municipal debt costs are 14 to 25 basis points lower, in states where GAAP is mandated. Moreover, municipalities in states that impose the GAAP requirement realize lower debt costs following the effective date of the regulation. These results suggest that GAAP requirements reduce municipal borrowing costs. More generally, the evidence indicates that financial reporting regulation reduces contracting costs between borrowers and lenders.

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BALL, RYAN, ROBERT M. BUSHMAN, and FLORIN P. VASVARI. "The Debt-Contracting Value of Accounting Information and Loan Syndicate Structure." Journal of Accounting Research 46, no. 2 (May 2008): 247–87. http://dx.doi.org/10.1111/j.1475-679x.2008.00273.x.

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Cheng, Lin. "Organized Labor and Debt Contracting: Firm-Level Evidence from Collective Bargaining." Accounting Review 92, no. 3 (September 1, 2016): 57–85. http://dx.doi.org/10.2308/accr-51566.

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ABSTRACT This paper employs a firm-level collective bargaining dataset to investigate the effect of labor, as an important stakeholder of a firm, on debt contracting. I conjecture and provide evidence that firms with strong organized labor prefer bank loans to public bonds because, by communicating with banks privately, unionized firms can reduce the adverse selection costs while preserving the information asymmetry with organized labor. Furthermore, I show that organized labor influences the structure of syndicated loans. When firms with strong unions withhold public disclosures, but communicate privately with lead lenders, heightened information asymmetry between the lead lenders and the participant lenders induces the lead lenders to retain larger shares of the loans and form more concentrated syndicates. Overall, this study demonstrates that the proprietary costs of disclosure related to organized labor significantly influence firms' debt contracting decisions and outcomes. Data Availability: Data are available from sources identified in the text.

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Dou, Yiwei. "The Debt-Contracting Value of Accounting Numbers and Financial Covenant Renegotiation." Management Science 66, no. 3 (March 2020): 1124–48. http://dx.doi.org/10.1287/mnsc.2018.3276.

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Shivakumar, Lakshmanan. "The role of financial reporting in debt contracting and in stewardship." Accounting and Business Research 43, no. 4 (August 2013): 362–83. http://dx.doi.org/10.1080/00014788.2013.785683.

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Frankel, Richard, Chandra Seethamraju, and Tzachi Zach. "GAAP goodwill and debt contracting efficiency: evidence from net-worth covenants." Review of Accounting Studies 13, no. 1 (July 18, 2007): 87–118. http://dx.doi.org/10.1007/s11142-007-9045-0.

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Engert, Andreas, and Lars Hornuf. "Market standards in financial contracting: The Euro’s effect on debt securities." Journal of International Money and Finance 85 (July 2018): 145–62. http://dx.doi.org/10.1016/j.jimonfin.2018.03.017.

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Krishnaswami, Sudha, and Devrim Yaman. "Contracting costs and the window of opportunity for straight debt issues." Journal of Banking & Finance 31, no. 3 (March 2007): 869–88. http://dx.doi.org/10.1016/j.jbankfin.2006.06.013.

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Hasan, Iftekhar, Chun Keung Hoi, Qiang Wu, and Hao Zhang. "Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds." Journal of Financial and Quantitative Analysis 52, no. 3 (May 3, 2017): 1017–47. http://dx.doi.org/10.1017/s0022109017000205.

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We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

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Gassen, Joachim, and Rolf Uwe Fülbier. "Do Creditors Prefer Smooth Earnings? Evidence from European Private Firms." Journal of International Accounting Research 14, no. 2 (April 1, 2015): 151–80. http://dx.doi.org/10.2308/jiar-51130.

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ABSTRACT We investigate the interplay between creditor financing and the smoothness of earnings reported by European private firms, and document how heterogeneous debt-contracting infrastructures across Europe moderate this relation. We expect the smoothness of earnings to be positively related to the relative importance of credit providers in our setting. More importantly, we predict this relation to be more pronounced in regimes with higher bankruptcy and contract enforcement costs. Finally, we hypothesize that earnings smoothness is negatively related to the cost of debt of our sample firms. Our large-sample empirical evidence confirms our expectations. While the cross-sectional nature of our setting limits our potential to address endogeneity concerns and, thus, caution is required when interpreting our findings in a causal way, they are consistent with the accounting of European private firms being shaped by creditor incentives and with this link being moderated by the country-level efficiency of the debt-contracting infrastructure. JEL Classifications: M41; G14; F42. Data Availability: All data used in this study are publicly available from the sources identified in the text.

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Song, Hyungsang, and Bum J. Kim. "Bank Loans and Maturity of Corporate Bond Issues." Journal of Derivatives and Quantitative Studies 24, no. 2 (May 31, 2016): 221–44. http://dx.doi.org/10.1108/jdqs-02-2016-b0002.

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This paper studies the impact of bank monitoring on the maturity structure of corporate debt issues using Korean firms listed on Korea Exchange from 2005 to 2011. We show that a higher proportion of bank debt in the small and medium enterprises results in corporate debt of longer maturity. The close relationship between banks and SMEs creates information and alleviates information asymmetry problem of borrowing firms. However, banks less perform monitoring and screening as information creator in the relationship with big firms. Because big firms have information asymmetry less than SMEs, and they suffer less problems from information asymmetry when contracting debt. The Probit regression shows that the Bank-Firm relationship increases possibility of issuing corporate debt of longer maturity in SMEs, and it supports the results of regressions above.

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Majid, Jamaliah Abdul. "AUDIT COMMITTEE INDEPENDENCE AND A CONTRACTING PERSPECTIVE ON GOODWILL IMPAIRMENT: SINGAPOREAN EVIDENCE." Business: Theory and Practice 18 (August 8, 2017): 128–35. http://dx.doi.org/10.3846/btp.2017.013.

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This study examines factors influencing and constraining the decision to recognize zero goodwill impairment in a sample of 52 Singaporean listed firms from 2010–2012. Using binary logistic regressions, the results reveal that firms that are approaching violation of their debt covenants have a higher likelihood of exercising the recognition choice, while a higher proportion of audit committee independence constrains this choice. The policy implication of this study is that to improve the quality of the financial statements, the relevant authorities need to monitor firms’ reporting incentives closely. This study contributes to the literature on IFRS by providing evidence that supports the applicability of the debt hypothesis in explaining the decision of Singaporean listed firms to recognize zero goodwill impairment.

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Deno, Snježana, Thomas Loy, and Carsten Homburg. "What Happens If Private Accounting Information Becomes Public? Small Firms’ Access to Bank Debt." Entrepreneurship Theory and Practice 44, no. 6 (September 24, 2019): 1091–111. http://dx.doi.org/10.1177/1042258719877129.

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We examine the effect of private accounting information becoming public on small firms’ access to bank debt. Both proprietary cost of disclosure and relationship banking have contributed to German private firms’ traditional non-disclosure of financial statements. We employ a regulatory change, which increased enforcement and established severe fines for firms that do not publicly disclose financial statements, as a quasi-natural experiment. We find that small firms’ access to bank debt has significantly increased after the disclosure shock. With our study based on a novel dataset in a non-voluntary private firm setting, we contribute to the discussion on private and public information in debt contracting.

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Ang, James S., and Min-Je Jung. "Explicit versus implicit contracting in the debt market: The case of leasing." International Review of Financial Analysis 7, no. 2 (1998): 153–69. http://dx.doi.org/10.1016/s1057-5219(99)80032-5.

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40

Demerjian, Peter, John Donovan, and Melissa F. Lewis‐Western. "Income Smoothing and the Usefulness of Earnings for Monitoring in Debt Contracting." Contemporary Accounting Research 37, no. 2 (February 28, 2020): 857–84. http://dx.doi.org/10.1111/1911-3846.12544.

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41

Fang, Xiaohua, Yutao Li, Baohua Xin, and Wenjun Zhang. "Financial Statement Comparability and Debt Contracting: Evidence from the Syndicated Loan Market." Accounting Horizons 30, no. 2 (March 1, 2016): 277–303. http://dx.doi.org/10.2308/acch-51437.

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SYNOPSIS In this study, we examine whether and how borrowing firms' financial statement comparability affects the contracting features of syndicated loans. Using a sample of loans issued by U.S. public firms in the syndicated loan market over the period 1992–2008, we find strong and robust evidence that financial statement comparability is negatively associated with loan spread and the likelihood of pledging collateral, and positively associated with loan maturity and the likelihood of including performance pricing provisions in loan contracts. We also find that borrowing firms with greater financial statement comparability are able to complete the loan syndication process more swiftly, form loan syndicates enabling the lead lenders to retain smaller percentages of loan shares, and attract a greater number of lenders and, particularly, a greater number of uninformed participating lenders. Altogether, these findings are consistent with the view that financial statement comparability plays an important role in alleviating information asymmetry in the syndicated loan market. JEL Classifications: G12; G14; M41

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42

Babich, Volodymyr, and Christopher S. Tang. "Franchise Contracting: The Effects of The Entrepreneur's Timing Option and Debt Financing." Production and Operations Management 25, no. 4 (October 8, 2015): 662–83. http://dx.doi.org/10.1111/poms.12497.

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43

DEMERJIAN, PETER R., JOHN DONOVAN, and CHAD R. LARSON. "Fair Value Accounting and Debt Contracting: Evidence from Adoption of SFAS 159." Journal of Accounting Research 54, no. 4 (June 27, 2016): 1041–76. http://dx.doi.org/10.1111/1475-679x.12126.

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Jiang, Liangliang, and Hui Zhou. "The role of audit verification in debt contracting: evidence from covenant violations." Review of Accounting Studies 22, no. 1 (January 19, 2017): 469–501. http://dx.doi.org/10.1007/s11142-016-9383-x.

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Mielcarz, Paweł, Dmytro Osiichuk, and Ryszard Owczarkowski. "Financial restructuring and target capital structure." Review of Accounting and Finance 17, no. 2 (May 14, 2018): 280–94. http://dx.doi.org/10.1108/raf-01-2017-0001.

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Purpose This paper aims to present an iterative algorithm that yields the amount of debt contracting/repayment or equity investment necessary to achieve the target capital structure. The model also helps to estimate the gains in shareholder value that result from financial restructuring process and lead to the optimal leverage ratio. Design/methodology/approach The paper maintains that certain benchmarks – i.e. industry average financial leverage and unlevered beta corrected for cash – make it possible to determine the parameters of the optimal capital structure for the company, so a failure to adjust to the target may result in value destruction. Findings The paper presents an iterative algorithm that yields the amount of debt contracting/repayment or equity investment necessary to achieve the target capital structure. Originality/value The proposed algorithm overcomes the methodological problems of existing approaches to the estimation of shareholder value gained through financial restructuring and implicitly solves the circularity problem in the calculation of the weighted average cost of capital.

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Darrough, Masako N., and Mingcherng Deng. "The Role of Accounting Information in Optimal Debt Contracts with Informed Lenders." Accounting Review 94, no. 6 (November 1, 2018): 165–200. http://dx.doi.org/10.2308/accr-52313.

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ABSTRACT We analyze the role of accounting information in debt contracting when the lender has private information that can assist in the borrower's investment decision. The lender might have acquired private information during the due diligence process or via past lending relationships. We show that the borrower has a stronger incentive to engage in a suboptimal investment decision (i.e., asset substitution) ex post when the lender lacks incentive to truthfully reveal this information. We identify conditions under which, ex ante, the borrower can incorporate accounting signals in the debt contract to mitigate the effect of the lender's private information and improve the borrower's investment efficiency. Our analysis offers an alternative explanation for the use of performance pricing in debt contracts. JEL Classifications: G21; G32; M41; M48.

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Tirole, Jean. "Country Solidarity in Sovereign Crises." American Economic Review 105, no. 8 (August 1, 2015): 2333–63. http://dx.doi.org/10.1257/aer.20121248.

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When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate, and available sanctions sufficiently tough. (JEL D86, F34, H63)

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Lu, Yu, and Diandian Ma. "Internal Control Weakness: A Literature Review." Accounting and Finance Research 8, no. 2 (April 4, 2019): 121. http://dx.doi.org/10.5430/afr.v8n2p121.

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The purpose of this essay is to review empirical literature on internal control weakness over the past seven years. I use an analysis framework consisting of determinants (corporate governance and other affecting factors) and economic consequences (accounting information quality, market reaction, cost of equity, debt contracting) of weakness disclosure and its remediation. Basic findings of prior studies agree that corporate governance and firm characteristics influence the presence of control problems and their remediation. In turn, the effectiveness of internal control impacts the quality of financing reporting, auditor reaction (auditing fees and audit delays), insider trading and leads to capital market consequences (the weakness disclosures affect debt contracting). More internal control studies combine with capital market and provide evidence that SOX are not always effective. Overall, these findings contribute to profession by suggesting that the disclosures of internal control deficiencies generally convey incremental information on the quality of financial reporting to investors. This review integrates and assesses current internal control weakness research and offers some suggestions for future study.

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Gong, Guojin, and Shuqing Luo. "Lenders' Experience with Borrowers' Major Customers and the Debt Contracting Demand for Accounting Conservatism." Accounting Review 93, no. 5 (January 1, 2018): 187–222. http://dx.doi.org/10.2308/accr-52022.

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ABSTRACT Lenders often have lending relationships with borrowers' major customers (labeled as “supply-chain lenders”). We hypothesize that private information obtained from borrowers' major customers can facilitate more timely and precise evaluation of borrowers' creditworthiness; this potentially reduces supply-chain lenders' reliance on accounting conservatism in debt contracting. Consistently, we find that suppliers borrowing from supply-chain lenders provide less conservative financial statements than suppliers borrowing from non-supply-chain lenders at loan origination. This finding is more pronounced when supply-chain lenders are likely to have greater information advantage over non-supply-chain lenders. Based on latent factors that proxy for private information accessible from customers, we find that supply-chain lenders' information advantage relates to customers' future operational and financial risks. Further, in lending agreements, supply-chain lenders accept fewer accounting-based contractual terms, lower spreads, and longer loan maturity than non-supply-chain lenders. The overall evidence suggests that borrowers' major customers represent an important information channel that enables lenders to more effectively screen and monitor borrowers, thus weakening the debt contracting demand for accounting conservatism.

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Donelson, Dain C., Ross Jennings, and John Mcinnis. "Financial Statement Quality and Debt Contracting: Evidence from a Survey of Commercial Lenders." Contemporary Accounting Research 34, no. 4 (November 16, 2017): 2051–93. http://dx.doi.org/10.1111/1911-3846.12345.

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Journal articles on the topic 'Debt Contracting'

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