REVISION: Scope for Renegotiation in Private Debt Contracts
Date Posted: Mar 06, 2013
: Frequent contract renegotiation is puzzling from a theory standpoint and remains to be understood empirically. I focus on contracting frictions to explain the scope for renegotiation of private debt contracts. Unlike prior work, I study a large sample of renegotiations subject to lender majority consent. My findings indicate that the scope for renegotiation rises with information uncertainty and is inversely associated with information asymmetry and lack of verifiability. The scope for renegot
REVISION: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Feb 27, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consist
New: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Feb 13, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consist
REVISION: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Jan 10, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the co
REVISION: On Estimating Conditional Conservatism
Date Posted: Dec 03, 2012
The concept of conditional conservatism has provided new insight into financial reporting and has stimulated considerable research since Basu (1997) developed it. While the concept encapsulated in the adage “anticipate no profits but anticipate all losses” is reasonably clear, estimating it is the subject of some discussion, notably by Dietrich et al. (2007), Givoly et al. (2007), and Ball, Kothari and Nikolaev (2011). Recently, Patatoukas and Thomas (2011) report important evidence of possi
REVISION: The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy
Date Posted: Jan 10, 2012
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosu
REVISION: Capital Versus Performance Covenants in Debt Contracts
Date Posted: Sep 26, 2011
Building on contracting theory, we argue that financial covenants control the conflicts of interest between lenders and borrowers via two different mechanisms. Capital covenants control agency problems by aligning debtholder-shareholder interests. Performance covenants serve as tripwires that limit agency problems via the transfer of control to lenders in states where the value of their claim is at risk. Companies trade off these mechanisms. Capital covenants impose costly restrictions on capit
REVISION: Loan Ownership Dispersion and Control over Mandatory GAAP Changes
Date Posted: Oct 10, 2010
Using a sample of 500 private credit agreements originated over the 1996 to 2004 period, we study firms’ choice of contracting practice with respect to mandatory changes in GAAP – understanding the choice of contracting practice is necessary to understand the economic consequences of GAAP changes. We identify a new contracting practice that differs from the practices documented in prior work in that it gives the contracting parties a valuable option to exclude the effect of accounting changes. B
REVISION: Debt Covenants and Accounting Conservatism
Date Posted: Aug 29, 2010
Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if th
New: Disproportional Control Rights and the Bonding Role of Debt
Date Posted: Dec 04, 2009
We examine how firms’ capital structure choices vary with the presence of dual-class ownership and the degree of disproportional control associated with it. We document that, compared to a propensity-matched sample of single-class firms, dual-class firms have higher leverage, greater propensity to issue private debt, more long-term debt, and greater reliance on financial covenants. Within our dual-class sample, the use of debt financing increases with the degree of disproportional control via vo
REVISION: Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly
Date Posted: Aug 18, 2006
We show that the agency theory of overvalued equity (see Jensen, 2005, and others) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996). Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation. Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms. In
The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate disclosure Policy
Date Posted: Jun 02, 2005
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosu