Direct Evidence on the Informational Properties of Earnings in Loan Contracts

Dyreng, Scott D.; Vashishtha, Rahul; Weber, Joseph

doi:10.2139/ssrn.2494360

Cited by 24 publications

(32 citation statements)

References 71 publications

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“…Following this line of reasoning, Christensen and Nikolaev hypothesize that capital covenants align the incentives of the contracting parties ex ante by limiting the amount of the borrower's debt, whereas performance covenants serve primarily as "trip wires" that transfer control rights ex post. The evidence in Christensen and Nikolaev [2012], Dyreng, Vashishtha, and Weber [2014], Hollander and Verriest [2015], and Honigsberg et al [2015] is broadly consistent with this hypothesis. Li, Vasvari, and Wittenberg-Moerman [2015] analyze another potentially important efficiency channel-the dynamic allocation of control rights over the life of the loan.…”

Section: Contracting?supporting

confidence: 73%

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Christensen

Nikolaev

Wittenberg-Moerman

2016

J of Accounting Research

252

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This paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers. Its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research. We argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved. By discussing its rich theoretical implications, we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency. JEL codes: G32; G34; M40; M41

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Section: Contracting?supporting

confidence: 73%

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Christensen

Nikolaev

Wittenberg-Moerman

2016

J of Accounting Research

252

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“…Arguably, managers are motivated to inflate their core earnings rather than the bottom-line net income because most investors currently base their investment decisions on this number Bradshaw and Sloan 2002;Elliott 2006). In addition, the extant research suggests that debt markets also pay more attention to this number (Dyreng et al 2016;Li 2010). This might motivate companies to engage in classification shifting.…”

Section: Introductionmentioning

confidence: 99%

Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

et al. 2018

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The question of whether females tend to act more ethically or risk-averse compared to males is an interesting ethical puzzle. Using a large sample of US firms over the 1992-2014 period, we investigate the effect that the gender of a chief executive officer (CEO) has on earnings management using classification shifting. We find that the pre-Sarbanes-Oxley (SOX) Act period was characterized by high levels of classification shifting by both female and male CEOs, but the magnitude of such practices is, surprisingly, significantly higher in firms with female CEOs than in those with male CEOs. By contrast, our results suggest that following the passage of the punitive SOX Act, classification shifting by female CEOs declined significantly, whilst it remained pervasive in firms with male CEOs. This suggests that the observable differences in financial reporting behavior between male and female CEOs seem to be because female CEOs are more risk-averse, but not necessarily more ethically sensitive than their male counterparts are. The central tenets of our findings remain unchanged after several additional checks, including controlling for alternative earnings management techniques, corporate governance mechanisms, CEO and chief financial officer characteristics and propensity score-matching.

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“…The role of borrower-specific financial covenants in monitoring credit risk has been well established in the accounting literature (e.g., Dichev and Skinner [2002], Christensen, Nikolaev, and Wittenberg-Moerman [2016]). Prior studies show that lenders adjust the accounting definitions in covenants to alleviate agency costs and acquire timely signals of a borrower's financial performance (e.g., Leftwich [1983], Beatty, Ramesh, and Weber [2002], Li [2010], Dyreng, Vashishtha, and Weber [2017]). However, the extent to which the customization of covenant specifications varies across different types of lenders has received little attention in the literature.…”

Section: Introductionmentioning

confidence: 99%

“…Prior studies document that the choice of different covenant types is driven by a cost-benefit analysis of how covenant mechanisms lower agency costs (e.g., Dichev and Skinner [2002], Christensen and Nikolaev [2012], Ball, Li, and Shivakumar [2015], Dey, Nikolaev, and Wang [2016]). Also, the design of covenant packages and their specifications is shown to be affected by the quality and reliability of the underlying accounting information (e.g., Demerjian [2011], Brown [2016], Demerjian, Donovan, and Larson [2016]) as well as by loan-and borrower-specific characteristics (e.g., Beatty, Ramesh, and Weber [2002], Beatty, Weber, and Yu [2008], Li [2010], Costello and Wittenberg-Moerman [2011], Li [2016], Dyreng, Vashishtha, and Weber [2017]). We provide evidence consistent with efficient contracting by showing that covenant specifications vary across different types of lenders.…”

Section: Introductionmentioning

confidence: 99%

Corporate Loan Securitization and the Standardization of Financial Covenants

Bozanic

Loumioti²,

Vasvari

2017

J of Accounting Research

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We examine whether syndicated loans securitized through collateralized loan obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than nonsecuritized institutional loans. In addition, Z. BOZANIC, M. LOUMIOTI, AND F. P. VASVARI we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization alleviates information processing costs related to loan monitoring and screening. We also document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.

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Direct Evidence on the Informational Properties of Earnings in Loan Contracts

Cited by 24 publications

References 71 publications

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

Corporate Loan Securitization and the Standardization of Financial Covenants

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