Accounting Quality and Debt Contracting

Bharath, Sreedhar T.; Sunder, Jayanthi; Sunder, Shyam V.

doi:10.2139/ssrn.591342

Cited by 304 publications

(522 citation statements)

References 4 publications

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“…Existing theories suggest that borrowing firms consider the disclosure costs when financing growth opportunities with external funds (Francis et al ., ) and that creditors structure different contracting devices as a function of the borrowing firms’ financial information quality (Flannery, ; Wittenberg‐Moerman, ). The leading argument in this literature is that a lower quality of contracting financial information increases information asymmetries in debt contracting, thereby explaining the limited access to debt markets, higher risk premiums and more restrictive contract terms (Bharath et al ., ; Dhaliwal et al ., ). To the extent that less transparent disclosures hamper the forecasting ability of future cash flows and the assessment of cash flow riskiness, creditors find it difficult to evaluate the firm credit quality, thereby explaining the poor prospects for firms to access the debt market in a cost‐effective manner.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Who monitors opaque borrowers? Debt specialisation, institutional ownership, and information opacity

Platikanova

Soonawalla

2019

Accounting & Finance

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In this study, we suggest that the level of information opaqueness determines the propensity of publicly listed firms to have debt financing from only a few debt types (i.e., debt specialisation). Using accruals quality as a proxy for information opaqueness, we find that the degree of debt specialisation is lower for firms with high-quality accruals. This result is consistent with the notion that information collection and monitoring costs are higher for firms that have higher informational opacity, explaining the tendency towards debt specialisation. We further argue that creditors need not monitor borrowers so closely when they are monitored by institutional owners. The empirical findings support this argument and show that firms with more stable institutional ownership are likely to have less specialised debt types. The empirical evidence is also consistent with the expectation that stable institutional ownership is likely to reduce the demand for monitoring over accruals management. Using S&P 500 membership as an exogenous event driving institutional ownership changes, we further document that debt specialisation is decreasing in accruals quality when institutional investors are expected to have an influence.An extensive literature in corporate finance and financial accounting examines the accounting information properties that facilitate access to debt

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…Bharath et al . () argue that banks are in a better position to reduce adverse selection due to their access to private information and superior information processing skills, which helps to explain the higher proportion of the bank financing of firms with lower accounting quality. Beatty et al .…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Who monitors opaque borrowers? Debt specialisation, institutional ownership, and information opacity

Platikanova

Soonawalla

2019

Accounting & Finance

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“…Evidence from the US bond market that smoothing is associated with lower cost of debt is not generalizable to broader credit markets, because the bond market is populated by relatively high quality, transparent borrowers. Thus, the garbling view of smoothing seems relatively unlikely to manifest (Bharath, Sunder, & Sunder, ).…”

Section: Introductionmentioning

confidence: 99%

Sign reversal in the relationship between income smoothing and cost of debt

Amiram

Owens

2017

Business Fin & Account

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Despite the fact that income smoothing by managers is a pervasive phenomenon that has been widely researched, extant literature provides incomplete evidence on how smoothing is associated with cost of debt in general, and in the private loan market in particular. The institutional factors associated with private loan contracts, combined with the theoretical motivations for smoothing, make it unclear whether smoothing will be positively, negatively, or not associated with loan spread. Using both cross-country and within-country analyses on an international sample of private loans, we predict and provide evidence that income smoothing is associated with lower cost of debt when the threat of private benefits consumption by managers is low, but is associated with higher cost of debt when the threat of private benefits consumption by managers is high. We provide the first evidence in the literature that the garbling effect of smoothing can predictably dominate the signaling view of smoothing in debt contract design, and we identify private benefits consumption threat as the feature of the contracting environment that empirically reveals a sign reversal in the relationship between smoothing and cost of debt.

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“…With regard to the pricing of information risk into the cost of debt, FLOS document that poorer accounting quality results in higher debt costs for firms. Similarly, Bharath, Sunder, and Sunder () show that accounting quality affects the use of private or public debt and the pricing and contract terms of debt. Generally, it is shown that poorer accounting quality results in higher prices of debt and less favorable terms for the borrower.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 95%

Information Risk and the Cost of Capital

Eckles¹,

Halek²,

Zhang³

2013

J of Risk & Insurance

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This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property–liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.

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Accounting Quality and Debt Contracting

Cited by 304 publications

References 4 publications

Who monitors opaque borrowers? Debt specialisation, institutional ownership, and information opacity

Who monitors opaque borrowers? Debt specialisation, institutional ownership, and information opacity

Sign reversal in the relationship between income smoothing and cost of debt

Information Risk and the Cost of Capital

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