Financial Statement Comparability and Debt Contracting: Evidence from the Syndicated Loan Market

Abstract

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

Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings

“…Using firm‐level measures of comparability, Bradshaw et al () and De Franco et al () find that financial analysts' earnings forecasts are more accurate and less dispersed for firms with financial statements that are more comparable with those of their industry peers. In addition, Kim et al () and Fang et al () report that comparability provides benefits in public debt markets and private loan markets, respectively. While these prior studies provide valuable insights into some benefits of comparability, no evidence on the relation between comparability and stock price informativeness exists.…”

“…This study contributes to the growing literature on the benefits of comparability. First, while prior studies shed light on some benefits, such as improving the analysts' information environment (Bradshaw et al ; De Franco et al ), improving acquisition decisions (Chen et al ), and reducing the cost of debt capital (Kim et al ; Fang et al ), we focus on the benefits to equity investors. Specifically, our distinction between market‐/industry‐level and firm‐specific information reflected in stock prices is important in assessing the usefulness of comparability because these components should have different implications for investors' capital allocation decisions.…”

Financial Statement Comparability and New Debt Issues

“…In addition to equity market studies, there has been some examination of the effects of comparability in the debt market setting as well. In the syndicated loan market setting, Fang, Li, Xin, and Zhang (2016) find that comparability impacts debt issue metrics. Fang et al (2016) find that lower loan spreads and lower likelihood of collateral requirements are related to higher levels of comparability.…”

“…In the syndicated loan market setting, Fang, Li, Xin, and Zhang (2016) find that comparability impacts debt issue metrics. Fang et al (2016) find that lower loan spreads and lower likelihood of collateral requirements are related to higher levels of comparability. Additionally, more comparable firms were more likely to have longer maturities and performance pricing, indicating that banks who issue syndicated loans offer more beneficial terms to firms with financial statements that have higher comparability.…”

“…Prior literature suggests a positive influence of financial reporting quality on capital market participants, such as financial analysts and equity investors (De Franco et al, 2011;Kothari et al, 2010). We specifically complete studies of Fang, Li, Xin, and Zhang (2016), Kim, Kraft, and Ryan (2013), and Imhof, Seavey and Smith (2017) that suggest that comparability can reduce information asymmetry and information risk, and consequently cost of capital. Our evidence suggests that when firms issue new debts, accounting comparability is an important consideration in cost of debt.…”