The Roll Of Accounting In Debt Contract Renegotiations
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Author | : |
Publisher | : |
Total Pages | : 68 |
Release | : 2014 |
Genre | : |
ISBN | : |
Using a hand-collected sample of private debt contracts between U.S. publicly traded firms and financial institutions, I examine the role of accounting in the renegotiation of debt contracts following a positive shock to the borrower's credit quality. I find that, following a positive shock to their credit quality, firms with more timely reporting of good news are more likely to renegotiate their loan contracts and they do so sooner than firms with less timely good news reporting. Further, these effects are more pronounced for firms whose positive shocks can be more credibly communicated through financial reporting. My paper contributes to the literature on the role of accounting information in debt contract renegotiations.
Author | : Jing Li |
Publisher | : |
Total Pages | : 34 |
Release | : 2010 |
Genre | : |
ISBN | : |
His paper develops a theoretical model to understand the role of accounting conservatism in debt contracts, incorporating the possible renegotiation of debt contracts with accounting-based covenants. I find that the demand for accounting conservatism depends on whether renegotiation occurs and if so, at what cost. When the covenant is not renegotiable or when renegotiation cost is sufficiently high, more conservative accounting actually reduces the efficiency of debt contracts. When renegotiation cost is moderate, more conservative accounting may increase the entrepreneur's welfare under certain conditions, especially for firms with less promising investment opportunities and for firms with higher liquidation values. Both are characteristics of ``traditional industriesquot; characterized by low growth and high level of tangible assets in place. When renegotiation is costless, the degree of accounting conservatism becomes irrelevant and the first best liquidation is always achieved. These results call for more cross-sectional examinations on the role of accounting conservatism in debt contracts in empirical studies.
Author | : Aikaterini Ferentinou |
Publisher | : |
Total Pages | : |
Release | : 2018 |
Genre | : |
ISBN | : |
The purpose of this thesis is to examine the effect of a number of debt issue characteristics on debt contracting efficiency. After the initiation of a debt contract, inefficiencies can arise due to incomplete contracts and agency costs. I contribute to understanding whether debt maturity, different types of accounting-based (balance-sheet- and income-statement-based) debt covenants, as well as ability of renegotiation can restore efficiency. The research is motivated by the fact that there is an inconsistency in empirical and analytical results regarding the role of conservatism (beneficial or not) in the debt contracting setting. A reason for this inconsistency may well be the consideration of debt maturity. Previous analytical literature studies short-term debt contracts, while inefficiencies in the form of increased agency costs exist in case of longer debt maturity. Furthermore, analytical research does not examine balance-sheet debt covenants, although they also improve debt efficiency. My analytical show that there is a higher level of conservatism, when the long-term debt contracts include balance-sheet rather than income-statement debt covenants. Moreover, a higher level of conservatism is required under long-term than under short-term debt contracts, given that the conflict of interest between the firm and the lender is strong. My empirical findings provide empirical evidence in accordance with my analytical findings, while I also find that long-term (short-term) debt contracts include more (less) balance-sheet than income-statement debt covenants. Finally, I find that when renegotiation is an option, the intensiveness of the conflict of interest, the probability that the project is good, along with the level of renegotiation cost will determine the optimal level of conservatism. As the renegotiation cost increases, the result becomes more liberal, under a moderate conflict of interest and more conservative, under a strong conflict of interest.
Author | : Thomas D. Fields |
Publisher | : |
Total Pages | : |
Release | : 2004 |
Genre | : |
ISBN | : |
One of the major uses of accounting information is in mitigating the conflict of interest problems which arise because of the different incentives of debt-holders and equity-holders. These incentive problems frequently lead to the inclusion of contractual debt covenants within lending agreements. The optimal use and form of such covenants is therefore of interest to both academics and practitioners. This dissertation expands on existing theory by considering two important aspects of debt covenants which have often been ignored. The first chapter of the dissertation considers the role played by the use of multiple covenants within the same debt contract. I develop a model that highlights the tradeoffs and interdependencies among different covenants in a multi-dimensional contract, and the effect of specific covenants on controlling over and under-investment problems caused by the different incentives faced by lenders and shareholders. A second chapter of the dissertation recognizes that debt covenants are written using numbers produced by the firm's accounting system, and develops a theory of how expected future accounting changes may affect the optimal debt contract in the presence of renegotiation. In particular the dissertation establishes how the effect of changes in accounting rules can play a role in determining when renegotiation occurs.
Author | : Valeri V. Nikolaev |
Publisher | : |
Total Pages | : 64 |
Release | : 2016 |
Genre | : |
ISBN | : |
I provide new evidence on the renegotiation of financial contracts using a comprehensive sample of over 90,000 debt contract renegotiations. I study whether the demand for monitoring determines the renegotiation intensity, defined as either the renegotiation frequency over a period of time or the time between renegotiations. Theory suggests that frequent debt contract renegotiation trades off the benefits of enhanced monitoring with the costs of suboptimal creditor intervention. Consistent with this tradeoff, I find that proxies for the increased demand for monitoring, such as financing constraints and the audit premium, exhibit a higher renegotiation intensity. In turn, the costs of creditor monitoring, proxied by the presence of growth options and R&D, are associated with a lower renegotiation intensity. I also find that contractual monitoring mechanisms, such as syndicate concentration and control rights, exhibit robust positive associations with renegotiation intensity. The evidence supports theories that emphasize the strategic aspect of control rights. Finally, renegotiations reveal new information to the market, consistent with their role in reducing information asymmetries. Overall, the evidence suggests the demand for monitoring is an important driver of renegotiation.
Author | : Mark Clatworthy |
Publisher | : Taylor & Francis |
Total Pages | : 150 |
Release | : 2021-05-13 |
Genre | : Business & Economics |
ISBN | : 1000344606 |
Accounting and Debt Markets: Four Pieces on the Role of Accounting Information in Debt Markets provides novel and up-to-date evidence on the role of accounting information in debt markets Companies and organisations worldwide rely heavily on debt markets for short, medium and long-term financing, and debt markets and financial intermediaries have significant effects on the real economy. Accounting information has various functions in debt markets, including inter alia, informing pricing decisions and credit ratings, determining the allocation of creditor control rights and establishing bank capital adequacy requirements. The chapters in this book provide illustrative discussion, analysis and evidence on the importance of accounting information in credit markets. The first of the four pieces reflects on how a conservative financial reporting system helps firms obtain debt funds and with better conditions, and why this is the case. The second examines the effects of accounting disclosure on credit ratings of private companies and shows that accounting information is useful for credit rating agencies. The two final pieces reflect on how banks should account for credit losses, and on how regulators are tackling this issue. The chapters in this book were originally published as a special issue of Accounting and Business Research.
Author | : Christian Laux |
Publisher | : |
Total Pages | : 37 |
Release | : 2020 |
Genre | : |
ISBN | : |
We study the interaction between strategic managerial information acquisition and shareholders' optimal degree of conservative accounting. Conservative accounting results in more frequent early warnings that allow lenders or corporate boards to take corrective actions, but also increases the risk of false alarms and excessive interventions. Managers' ability to gather additional evidence changes this trade-off because managers have an intrinsic incentive to obtain and disclose evidence that prevents intervention. Managers' incentives to refute low accounting reports, but not high reports, reduces the negative consequences of conservative reporting without altering its benefits. In addition, conservatism increases the likelihood that managers find favorable evidence after an early warning and hence induces greater effort in gathering evidence. Our model provides a novel explanation for the empirical observations that conservatism plays a positive role in debt contracts and that covenant violations frequently trigger debt contract renegotiation and covenant waivers.
Author | : Boon-Chye Lee |
Publisher | : Routledge |
Total Pages | : 156 |
Release | : 2019-09-06 |
Genre | : Political Science |
ISBN | : 1000244334 |
The author considers the risks that the failure of Third World economies pose for highly exposed banks, whose collapse would threaten domestic as well as international financial systems.
Author | : Mr.Udaibir S. Das |
Publisher | : International Monetary Fund |
Total Pages | : 128 |
Release | : 2012-08-01 |
Genre | : Business & Economics |
ISBN | : 1475505531 |
This paper provides a comprehensive survey of pertinent issues on sovereign debt restructurings, based on a newly constructed database. This is the first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, creditor participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses.
Author | : United States. Congress. House. Committee on Government Operations. Government Activities Subcommittee |
Publisher | : |
Total Pages | : 62 |
Release | : 1970 |
Genre | : Defense contracts |
ISBN | : |