Discussion of “Accounting standards and debt covenants: Has the “Balance Sheet Approach” led to a decline in the use of balance sheet covenants?”

Skinner, Douglas J.

doi:10.1016/j.jacceco.2011.09.004

Cited by 45 publications

(14 citation statements)

References 21 publications

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“…Panel C of table 4 reveals that the number of covenants attached to loans is decreasing in BCE. This finding is consistent with Skinner [2011], who conjectures that one potential reason that so few covenants are included in debt agreements is due to the "nature of competition in debt markets." To the extent that #Covenants captures how restrictive the loan terms are for the borrower, this result provides evidence that banks are willing to relax the restrictiveness of loans when facing increased competition.…”

Section: Competition and Loan Restrictionssupporting

confidence: 91%

Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

Bushman

Hendricks

Williams

2016

J of Accounting Research

135

106

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This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text‐based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank's contribution to system‐wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift toward noninterest revenue. Further, we find that higher competition is associated with higher stand‐alone risk of individual banks, greater sensitivity of a bank's downside equity risk to system‐wide distress, and a greater contribution by individual banks to downside risk of the banking sector.

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Section: Competition and Loan Restrictionssupporting

confidence: 91%

Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

Bushman

Hendricks

Williams

2016

J of Accounting Research

135

106

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“…Our findings contrast with prior evidence that other institutional loan investors, such as banks and insurance companies, prefer customized covenants (e.g., Leftwich [1983], El-Gazaar and Pastena [1990]), and support the theoretical arguments on the standardization of securitized loan contracts (e.g., Jobst [2002], Ayotte andBolton [2011], Triantis [2013]). Our setting also allows us to provide new evidence that is consistent with the arguments in Skinner [2011] that loan investors' monitoring costs affect the design of accounting-based covenants.…”

Section: Introductionsupporting

confidence: 63%

Corporate Loan Securitization and the Standardization of Financial Covenants

Bozanic¹,

Loumioti

Vasvari

2016

SSRN Journal

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“…In contrast to the well‐studied role covenants play in private debt upon technical violation, this paper contributes to the debt contracting literature by examining the relatively underexplored role covenants play in public debt (Skinner, ). In particular, the paper complements extant private debt contracting literature on renegotiation (e.g., Roberts and Sufi, ; Nikolaev, ; and Roberts, ) by providing evidence on the role accounting covenants serve in public debt ahead of technical violation, which is important considering the coordination problems, informational opacity, and lax bond indenture trustee monitoring that are all characteristic of the public debt setting.…”

Section: Resultsmentioning

confidence: 99%

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

Bozanic

2016

Business Fin & Account

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for their guidance and support. I am also indebted to Romano Peluso and Ronald Rose for their many discussions regarding bond indenture, bond trustee, and bankruptcy law. The Ex-Ante Monitoring Role of Accounting Covenants in Public Debt ABSTRACTIn contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers' actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default-a stark contrast to the ex-post renegotiation -trip wire‖ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex-ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex-ante renegotiation, in turn, is associated with decreased adverse credit events. Cross-sectional results support these findings as the ex-ante renegotiation role of accounting covenants varies with bondholders' and trustees' monitoring ability.JEL Classification: G32, L14, M41

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Discussion of “Accounting standards and debt covenants: Has the “Balance Sheet Approach” led to a decline in the use of balance sheet covenants?”

Cited by 45 publications

References 21 publications

Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

Corporate Loan Securitization and the Standardization of Financial Covenants

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

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