۱٫ Introduction

۲٫ Prior research and hypotheses

۳٫ Accounting choices and bond spread: the influence of legal and financial institutions

۴٫ Methodology

۵٫ Research design

۶٫ Results

۷٫ Robustness checks

۸٫ Conclusion

Declaration of Competing Interest

Appendix A. Rating scores

References

Abstract

We use a unique dataset of 11,497 corporate bonds issued by firms operating in 56 countries. The objective of the paper is to study the effect of timely loss recognition and accrual discretion on the design of public debt contracts in international bond markets, especially that previous research had more focus on bank loans rather than bonds. The paper provides an alternative explanation to prior literature for the relevance of timely loss recognition to the bond market, and clarifies more the role of accrual quality in debt contracting. We utilize our international sample to capture variations in the main analysis with respect to the legal enforcement in which the issuer firm operates, or the financial development of the market of issue. We find evidence that timely loss recognition is counterproductive with bond issuances, whereas accrual quality has a strong favorable impact on bond spread. The relevance of accounting choices to bond markets changes with the level of a country’s law enforcement and a market’s financial development. The paper encourages researchers to come up with different explanations for the influence of accounting choice on different types of debt contracts. It also highlights the role played by institutions to mitigate the effects.

Introduction

The corporate debt raised through capital international markets in the first quarter of 2018, amounted to 770.7 billion US dollars, 482.6 billion Euros, 56.3 billion British pounds, and 29.4 billion Australian dollars; among other issuances with other currencies and less amount1 . Though equity and debt are important sources of finance, equity markets have had the lion’s share in research; and debt markets remain to a large extent a black box. The fundamentals and stock market information of public corporations cannot get any easier to access. However, debt contract information has very specific databases that are costly. The paper takes a positive accounting theory approach, in which the core of the paper is how accounting choice affects contracting parties, and how managers use their discretion within the accepted set (the accounting standards) to reach a desired end state (see; Watts and Zimmerman, 1986); this type of research is very important because it tests the implications of accounting choice on debt contracting parties.