The Debt‐Contracting Value of Accounting Information and Loan Syndicate Structure

Abstract

We investigate how both the ownership structure and explicit contractual structure of syndicated loan deals are shaped by the debt‐contracting value (DCV) of borrowers' accounting information. DCV captures the inherent ability of firms' accounting numbers to capture credit quality deterioration in a timely fashion. We hypothesize and document that when a borrower's accounting information possesses higher DCV, information asymmetry between the lead arranger and other syndicate participants is lower, allowing lead arrangers to hold a smaller proportion of new loan deals. Further, we document that the influence of DCV on the proportion of the loan retained is conditional on the lead arranger's reputation, the existence of a credit rating, and the lead arranger's previous relationships with the same borrower. Finally, we find that when loans include performance pricing provisions, the likelihood that the single performance measure used is an accounting ratio, rather than a credit rating, is increasing in DCV.

Supplier Financing and Earnings Quality

“…Bharath et al () and Hasan et al () report similar results for the effect of accruals quality and earnings predictability, respectively, on bank loan terms: firms with higher earnings quality face significantly lower interest spreads, longer maturity of loans and lower collateral. Likewise, Ball et al () find that earnings quality influences the structure of syndicated loan.…”

“…Most of these studies on the economic implications of earnings quality have focused on capital markets, although recent papers study how accounting information affects private debt contracts (Ball et al., ; Bharath et al., ; Hasan et al., ). Bharath et al () and Hasan et al () report similar results for the effect of accruals quality and earnings predictability, respectively, on bank loan terms: firms with higher earnings quality face significantly lower interest spreads, longer maturity of loans and lower collateral.…”

CEO Risk‐taking Incentives and Bank Loan Syndicate Structure

“…Ball et al. () show that lead arrangers will hold a smaller portion of a syndicate if the accounting information of borrowing firms can capture credit quality in a timely fashion. Gopalan et al.…”

The Impact of Earnings Predictability on Bank Loan Contracting

“…Graham et al (2008) examine the effect of financial restatements on bank loan contracting and find that banks tighten loan contract terms after firms announce accounting restatements. Similarly, Ball et al (2008) find that the debt‐contracting value of accounting information affects the structure of syndicated loans.…”