The role of hard information in debt contracting: evidence from fair value adoption
Subject
Accounting
Publishing details
Social Sciences Research Network
Authors / Editors
Ertan A; Karolyi S
Biographies
Publication Year
2016
Abstract
We use fair value adoption as a quasi-natural experiment to analyze the real effects of hard information used in loan screening and contracting. After fair value adoption, the use of contingent contract terms depending on fair value accounting information significantly declined. Capital-based covenant usage by treated borrowers dropped by 7.7 percentage points relative to control borrowers. Treated borrowers also experienced 8.2% and 2.8% relative drops in borrowing and real activities, respectively, implying that they could not compensate with alternative financing sources. Our evidence suggests that properties of hard information drive debt contracting, particularly through screening, managerial discretion, and risk-shifting incentives.
Keywords
Loan contracting; Hard information; Covenants; Credit availability; Real affects
Series
Social Sciences Research Network