Abstract

We investigate an unexplored channel—loss given default (LGD)—through which accounting information can shape the design of debt contracts. Using a sample of defaulted bonds, we find that borrower accounting information available at contract initiation possesses significant power for predicting realized LGD at the subsequent default date. We then use this model to construct an accounting-based measure of expected LGD at the contracting date for a large sample of bond issuances. We find that this measure is positively associated with issuance date interest spread and covenant use, and document that these relations are not artifacts of an association between LGD and probability of default. We then show that accounting-based expected LGD has a stronger association with issuance date spread when the borrower’s underlying accounting is more conservative and when the accounting-based LGD predictors are more persistent. Our results increase our understanding of both the informational role and contracting role of accounting information.

Introduction

Financial reports are an important source of frm-specifc information available to lenders at the contracting date and thus may afect lenders’ behavior in the design of debt contracts. Whereas prior literature focuses on the usefulness of accounting information for probability of default assessment (e.g., Beaver 1966; Altman 1968; Shumway 2001), this study suggests that accounting information may also shape contracts by facilitating lenders’ assessment of loss given default. Loss given default, defned as the percentage loss that lenders experience from $1 of outstanding principal in a case of default, is a critical component of credit risk and debt contracting theories.1 Despite the theoretical importance of loss given default, there is little empirical evidence regarding how accounting information available to lenders at the contracting date is associated with their expectations about loss given default. This study is the frst to provide evidence that accounting information at the contracting date is a useful predictor of realized loss given default and that lenders behave as if they use accounting information about loss given default to design debt contracts.

Conclusion

A substantial body of research focuses on the informativeness of accounting information with respect to probability of default. However, there is very little research concerning the informativeness of accounting information with respect to loss given default, particularly at the contracting date. There exists some ancillary evidence in extant literature regarding the informativeness of accounting data about loss given default at the time of default. However, given the relatively long time between debt issuance and eventual default, this evidence says little about whether accounting information is useful to lenders in assessing expected loss given default at the contracting date—when lenders need information the most.

This study contributes to the literature along several dimensions. First, using a sample of defaulted bonds, we show that accounting measures available to lenders at the contracting date are informative about future loss given default. To the best of our knowledge, this study is the frst to do so. This fnding complements the literature which shows that accounting measures are informative about probability of default and therefore enhances our understanding of the informational role of accounting. Second, we construct an intuitive measure of accounting-based expected loss given default at the time of bond contract initiation, which could be of use in future research. Third, we show that lenders behave as if their accounting-based expectations about loss given default signifcantly afect price and non-price terms of bond contracts. We provide evidence that the association is stronger when the accounting-based predictors are more persistent, consistent with the intuition that accounting information with higher persistence is more reliable for predicting future outcomes. This fnding contributes to the literature on the role of accounting information in debt contracting by showing a specifc channel through which accounting information may be useful in lending decisions. Finally, our results provide important evidence that establishes a direct link between accounting-based LGD estimation and lenders’ demand for fnancial reporting conservatism.

Highlights

Abstract

Keywords

JEL classification

1. Introduction

2. Background Facts

3. Data

4. Bank Funding Dynamics

5. Are the Results Driven by Informationally Less Opaque Banks?

6. How Does Capital Account Liberalization Affect Small Banks?

7. Robustness Checks

8. Concluding Remarks

Acknowledgments

Appendix A.

References

Abstract

Using a sample of almost 600 banks in Latin America, we show that capital account liberalization lowers the share of equity and raises the share of interbank funding in total liabilities of the banking system. These shifts are mostly due to large banks; smaller banks, instead, increase their resort to retail funding by offering higher average deposit interest rates than larger banks. We also find significant differences in the behavior of banks with seemingly greater information opacity. These findings have positive implications for macro-prudential regulation.

1. Introduction

Lower controls on a country’s capital account can increase the conditional probability of macro-financial crises by facilitating the accumulation of foreign liabilities (Reinhart and Rogoff, 2008, Gourinchas and Obstfeld, 2012, Claessens and Ghosh, 2013, Catão and Milesi-Ferretti, 2014, Claessens, 2017).1 In examining the channels through which abundant global liquidity and capital flows raise crisis risk, many papers have looked at the role of bank lending to private firms and the government—flows that lie squarely on the asset side of banks’ balance sheets (Popov and Udell, 2012, Jordà et al., 2013, Lane and McQuade, 2014, Taylor, 2015; Ongena et al., 2015, Correa et al., 2015; Baskaya et al., 2017, Temesvary et al., 2018; Morais et al., 2019, Dinger and te Kaat, 2020; Hoffmann and Stewen, 2020, te Kaat, 2020). On the liability side, while there has been work on how bank leverage responds to swings in global liquidity and risk aversion (Bruno and Shin, 2015a, Bruno and Shin, 2015b), and on how capital control regulations affect the cost and volume of international borrowing and lending to firms (Bonfiglioli, 2008; Beakart et al., 2011; Varela, 2018; Ahnert et al. 2021), little attention has been devoted to how the distinct components of banks’ liabilities shift in response to changes in capital controls and how those shifts are conditioned by bank-specific characteristics (large vs. small, foreign vs. domestically-owned, having a more vs. a less opaque balance sheet).

This paper aims to fill some of this gap in the literature. We examine the response of the various liability components of banks—namely, equity, retail deposits, interbank deposits, bonds, other short-term debt, and non-interest liabilities—to changes in capital control regulations and ask whether and how such responses differ across smaller and larger banks, domestic vs. foreign-owned, and those with seemingly more vs. less opaque balance sheets. We do so using bank-level data from Bureau van Dijk’s Bankscope database for 17 Latin American countries over 1995–2013. Focusing on Latin America during this period is particularly suitable for the purpose of this investigation because of the region’s pattern of liberalization in external capital accounts, which was not only far-reaching, but also displayed considerable cross-country heterogeneity through the 1990s, 2000s and early 2010s, aiding identification.2 We further aid identification by controlling our estimates for a variety of country-specific macro and global financial variables, using a more accurate metric of capital controls developed in Fernández et al. (2016), and allowing for some possible endogeneity of capital controls. The sizable dimension of our panel data—across countries, banks, and time—coupled with our use of a rich set of macro-financial covariates in turn allows our findings to speak to the intersection of the prominent literature on banks, financial globalization and macro-financial risk.

1- Introduction

2- Hypotheses development

3- Data and variables

4- Results

5- Additional analyses

6- Endogeneity

7- Conclusion

References

Abstract

We study whether the presence of major customer-supplier relationships affects a supplier’s cost of debt. Using 5,704 U.S. corporate bonds issued from 1983 to 2013, we find that the cost of debt tends to be reduced when there are major customer-supplier relationships. This finding is robust to alternative measures of major customer-supplier relationships, subsample analyses, a propensity score matched sample analysis, and an instrumental variables approach. The results are consistent with the certification hypothesis, where a major customer serves as a monitoring and certifying entity for its supplier, thereby reducing information asymmetry between the supplier and its creditors. Moreover, the supplier’s cost of debt is further reduced if the issuing supplier has higher asset specificity, whereas suppliers in more competitive industries do not incur the benefits of the validation.

Introduction

Customer-supplier relationships are known to influence many financial activities of a firm. There are two major potential mechanisms through which a major customer-supplier relationship might affect a supplier firm’s cost of debt: the concentrated credit risk hypothesis and the certification hypothesis. According to the concentrated credit risk hypothesis (e.g., Becchetti and Sierra, 2003; Kale and Shahrur, 2007; Banerjee et al., 2008), a firm with major customer-supplier relationships often has to undertake relationship-specific investments, which will in turn lead to higher concentrated credit risk and higher cost of debt. In contrast, the certification hypothesis (Johnson et al., 2010; Hui et al., 2012; Cen et al., 2016) suggests a monitoring and certifying channel through which major customer-supplier relationships affect the value of the supplier. According to this hypothesis, customersupplier relationships facilitate major customers’ incentives on monitoring their suppliers, thereby reducing information asymmetry between the suppliers and their creditors, resulting in a lower cost of debt for the suppliers.1 Using various measures of major customer-supplier relationships, we find that in the corporate bond market, major customersupplier relationships reduce a supplier’s cost of debt, which is consistent with the certification hypothesis (Johnson et al., 2010; Cen et al., 2016). Given that an average issuing amount of our sample is $449 M, our regression analysis implies that issuing suppliers with at least one major customer can save approximately $462 K relative to otherwise identical firms at the time of the corporate bond offering. The results are robust to controlling for issuespecific variables and firm-related characteristics. We further test the certification hypothesis by analyzing the differential effects of asset specificity and product market competition on the relationship between the presence of major customersupplier relationships and the cost of debt. The transaction cost theory (e.g., Coase, 1937; Titman, 1984; Titman and Wessels, 1988) argues that a firm’s customers incur switching costs if the supplier is liquidated. These costs are especially high if the supplier’s assets are more specific. According to the certification hypothesis, major customers have higher incentives to monitor their suppliers that have higher asset specificity. Thus, the suppliers experience more benefits from monitoring and certification.

This paper examines the pricing of structured finance (SF) – asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDO) – and straight debt finance transactions. Using a cross-section of 24,525 European bonds issued by financial and nonfinancial firms in the 2000-2016 period, we show that although ratings are the most important pricing determinant for SF and corporate bonds (CB) at issuance, investors rely on other contractual, macroeconomic, and firms’ characteristics beyond these ratings. We find that CDO tranches have, on average, higher credit spreads than similarly rated CB, while investors are not compensated for facing higher systematic risk components in relation to investment-grade ABS and MBS. Our results also support the hypothesis of SF transactions as mechanisms of reducing funding costs: SF transactions’ weighted average spread is lower than that of comparable CB and originating firms’ creditworthiness does not deteriorate when compared to a sample of matched firms.

Introduction

Structured Finance (SF), in the form of asset securitization (AS), has become a significant source of financing for a wide variety of assets in recent decades. According to the Securities Industry and Financial Markets Association (SIFMA), the volume of securitized assets in Europe grew from €78.2 billion in 2000 to €818.7 billion in 2008, an increase of 946.9%.1 Despite the important role played by AS in the development and propagation of the 2007-2008 financial turmoil, 2 between 2009 and 2016 a total of €2,290.6 billion of securitized instruments were issued in Europe, compared with €11,732.0 billion in the United States (US). Although financial firms have issued the majority of AS bonds, we show that the issuance of AS bonds by nonfinancial firms located in Europe increased significantly by more than €34.0 billion in 2006, before declining to €1.65 billion in 2010, in the aftermath of the financial crisis (see Appendix A). AS and corporate bond (CB) markets are the largest security markets for corporate debt financing, both in Europe and the US (Choudhry, 2004; Loutskina, 2011). In this paper we compare credit spreads and pricing of AS bonds – asset backed-securities (ABS), mortgage backed-securities (MBS), and collateralized debt obligations (CDO) – with those of CB in a large sample of bonds (9,217 AS and 15,308 CB) issued by European financial and nonfinancial firms between January 1, 2000 and December 31, 2016. We also examine whether credit spreads convey information beyond credit ratings across AS and CB and if AS transactions allow originating firms to reduce funding costs vis-à-vis CB issuances.

Debt-to-equity conversion is a commonly used legal tool for financial restructuring of ailing businesses, yet systematic evidence on the consequences of debt-to-equity conversion for firm outcomes is scarce. Drawing on a novel dataset of bankruptcy reorganizations from Slovenia and exploiting variation in the incidence of debt-to-equity conversion across firms, we provide the first empirical analysis of the role of debt-to-equity conversion in bankruptcy reorganization as a determinant of post-bankruptcy firm survival. To address endogeneity concerns, we use a plethora of controls and fixed effects, quantify the sensitivity of our estimates to selection on unobservables, and rely on instrumental variable methods. We find that debt-to-equity conversion is robustly negatively associated with prospects of post-bankruptcy firm failure. Our findings provide a novel input into ongoing debates about the appropriate design of corporate bankruptcy institutions.

Introduction

Debt-to-equity conversion (DEC, in short) is a frequently utilized legal tool for alleviation of financial distress of firms nearing or experiencing insolvency (see, e.g., Chatterji and Hedges, 2001; Gilson et al., 1990; Gilson, 1990; James, 1995). From the creditors’ standpoint, DEC is often an attractive mode of debtor’s financial restructuring. Without DEC, creditors can often hope to recover only a small fraction of their claims. By reducing the company’s overall debt burden, DEC increases the prospects of claim recovery, even for creditors who choose not to take part in DEC. DEC further allows creditors to obtain control over the ailing business. DEC thereby provides creditors with the upside that the business will recover and that the value of their equity will grow. Institutionally, DEC can take place either during out-of-court financial restructuring or, when enabled by the legislative framework, within in-court bankruptcy reorganization proceedings. Empirical evidence on the effect of DEC on the performance of financially restructured business, however, is scant. Especially little is known about the consequences of bankruptcy-based DEC for post-bankruptcy firm outcomes. The corresponding lack of empirical evidence is unsettling because DEC has been routinely considered, or even advocated, as a mechanism of corporate bankruptcy resolution (Claessens et al., 2001; Hart, 2006; Laryea, 2010; Eric´ and Stosiˇ c, ´ 2015). In theory, DEC is expected to aid post-bankruptcy firm performance for two primary reasons. By lessening the debtor’s debt burden without an accompanying decrease in the firm’s assets, DEC instantaneously strengthens the firm’s balance sheet. An improved debt-to-equity ratio in turn enhances the firm’s borrowing position as well as the firm’s status vis-à-vis the customers, suppliers, and other business partners. In addition, by changing the firm’s ownership structure, DEC holds potential to improve decision-making at a critical juncture for the struggling business. Yet at the same time, DEC is not a guarantee that the business will succeed ex post. The firm’s new owners (creditors who opted for DEC) may come in conflict with the old owners or management, or continue to repeat errors that possibly contributed to the firm’s pre-bankruptcy turmoil.

This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.

Introduction

The movement towards mandating the adoption of International Financial Reporting Standards (IFRS) is considered the most widespread global financial reform in accounting history (Daske, Hail, Leuz, & Verdi, 2008). The premise of these standards is to improve the transparency and reliability of financial statements across the globe and facilitate cross border investments. As a result of this global dimension, determining the economic consequences of the accounting standards as part of financial regulatory reforms is both more challenging and important as more countries with diverse levels of development adopt IFRS (Zeff, 2012). A considerable body of literature investigates the economic effects of IFRS adoption in developed nations (Barth, Landsman, & Lang, 2008; Daske et al., 2008; Houqe, Monem, & Zijl, 2016) 1 . They report the consequences of the adoption of IFRS on several different users, including accountants, investors, analysts, governments and international regulators. However, few studies have investigated these effects in the Latin American context (Pelucio-Grecco, Geron, Grecco, & Lima, 2014; Rodríguez, Cortez, Méndez, & Garza, 2017). Examining these effects have significant potential economic and social implications for emerging countries, which can impact both national and international users of accounting information. Therefore, regulators are interested in whether adopting IFRS may have contributed toward reducing the cost of capital and consequentially signalling an increase in market efficiency and market liquidity (Han et al., 2016).

This paper explores whether the degree of household indebtedness can affect the effectiveness of monetary policy. We take an interacted panel VAR approach, using a panel of 23 countries, thereby obtaining several interesting findings, such as the responses of consumption and investment to monetary shocks are stronger in high levels of household debt. Furthermore, such responses become larger in a contractionary monetary policy stance rather than in an expansionary one, which suggests that monetary policy shocks have asymmetric effects. We have also found that monetary policy has a relatively larger impact in countries with higher share of adjustable-rate loans. Finally, we have found that when a country is in a high-debt state and in a contractionary policy stance, monetary policy is more powerful in countries with a higher share of adjustable-rate loans. We conjecture that these findings support the presence of a cash-flow channel with respect to the transmission of monetary policy in a high household debt state.

Introduction

We investigate whether household indebtedness affects the effectiveness of monetary policy, using a panel of 23 countries and covering the period from 1984:Q1 to 2015:Q4. To this end, we estimate the asymmetric effect of monetary policy dependent on the direction of policy stance, and the level of household indebtedness, thereby departing from the existing related literature, most of which focuses on the average effect of monetary shocks with opposite signs. In addition, we further examine the cash-flow channel in the transmission of monetary policy shocks, analyzing the cross-country differences in the predominant types of interest rate contracts that apply to household debts. If a country is dominated by fixed-rate mortgages (FRMs), one would expect the cash-flow channel to be relatively muted. However, in economies with mostly adjustable-rate mortgages (ARMs), the cash-flow channel may be more important for the transmission of monetary policy. There are some channels through which higher levels of household debt may amplify the effects of monetary policy shocks on overall economic activity. According to the supposed cash-flow channels, monetary policy can have a direct impact on aggregate household spending via the transfer of income between household borrowers and lenders. For example, a decline in interest rates will reduce lenders interest income, while also reducing interest payments on indebted households, resulting in income transfers between the two groups. It has been widely acknowledged that changes in cash flows may affect consumption, particularly for households that are more financially constrained. This implies that the aggregate effects of this transfer may not be muted if borrowing households are financially constrained.

1- Introduction

2- A general approach for valuing firm’s financial flexibility under default risk and bankruptcy costs

3- A simulation analysis

4- Concluding remarks

References

Abstract

Purpose – The purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.
Design/methodology/approach – The authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm’s capital structure more realistic and allows us to include flexibility into the firm’s debt structure management. The firm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.
Findings – The model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.
Research limitations/implications – The proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.
Practical implications – This model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.
Originality/value – To the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

Introduction

In a seminal paper, Modigliani and Miller (1959) showed that the use of debt financing can increase the market value of a firm as a consequence of the debt tax shield. However, the presence of debt in the capital structure can lead the firm to incur into default and distress costs (Warner, 1977; Altman, 1984; Opler and Titman, 1994). The valuation of distress costs is therefore an important task in financing decisions making (Oded and Michel, 2007; Lahmann et al., 2017). The impact of default costs on the firm’s value has been deeply investigated in the literature. Andrade and Kaplan (1998) estimate losses on the order of 10–23 percent of the predistress firm value. Glover (2016) confirms that the average cost among defaulted firms is about 25 percent of the predistress firm value.

1- Introduction

2- Financing of SME export activities

3- Sample selection and variable definitions

4- Descriptive statistics and univariate tests

5- Multivariate analysis

6- Robustness checks

7- Conclusions

References

Abstract

Using detailed financial and exporting data from Belgian small and medium-sized enterprises (SMEs) between 1998 and 2013, we find that exporters have to finance relatively more working capital than their nonexporting peers and that they resolve this financing need by carrying more short-term financial debt. In addition, while controlling for working capital needs, we find that the positive association between pledgeable short-term assets and short-term debt financing is more pronounced for exporters. In particular, we show that the linkage between pledgeable short-term assets and short-term debt financing is stronger for export-intensive firms and firms that serve distant and risky export destinations.

Introduction

Over the past decades, considerable effort has been devoted to enhancing our understanding of the complexity of corporate financing decisions. To date, studies on corporate capital structure and debt maturity choices have mainly focused on firm characteristics and industry determinants (De Jong, Kabir, & Nguyen, 2008; Titman & Wessels, 1988), as well as on the influence of the national culture, legislation and other country characteristics (Demirgüç-Kunt & Maksimovic, 1999; Fan, Titman, & Twite, 2012). Studies investigating the relationship between internationalization and corporate financing policy, however, are much more limited and are mostly confined to large, stock exchange quoted firms. One of the main insights of this literature is that multinational corporations (MNCs) have lower longterm debt ratios and higher short-term debt ratios than those of comparable domestic corporations (DCs) (Burgman, 1996; Doukas & Pantzalis, 2003; Fatemi, 1988). This leverage differential between MNCs and DCs is explained by the fact that the positive effect of geographic sales diversification on long-term debt financing is offset by the increased risk stemming from exchange rate exposure and unforeseen political events. Furthermore, due to their operational complexity, MNCs are more informationally opaque, which increases the agency costs of debt. To mitigate the problems associated with a riskier borrower profile and agency conflicts, loan maturities are shortened (Barclay & Smith, 1995; Myers, 1977). Building on these studies, the aim of this article is to advance the current literature by empirically investigating the impact of exporting on the corporate financing decisions of another important class of exporters, viz., small and mediumsized enterprises (SMEs). Since SMEs cannot substitute short-term and long-term debt financing as easily as large companies – due to difficulties in obtaining long-term debt financing from financial institutions (Ortiz-Molina & Penas, 2008) – the mechanism through which export activities affect SME financing policies may very well be different from what is demonstrated in the MNC literature. According to the World Trade Organization (WTO), access to financial resources to support export activities is a key concern for SMEs since, besides the one-time upfront sunk costs (e.g., costs related to compliance with foreign market regulations and preparatory market research), exporting requires substantial ongoing investment in working capital, as export activities considerably lengthen the cash conversion cycle of the firm (e.g., through longer shipment periods and the administrative burden associated with trading internationally) (WTO, 2016). Hence, understanding how exporting SMEs cope with these financing needs may yield useful insights for exporters, banks and policy makers.

1- Introduction

2- Data and research design

3- Main analyses

4- Extensions and robustness checks

5- Conclusion

References

Abstract

We find that both firm leverage and short-term debt ratios are negatively associated with social capital (i.e., the altruistic tendency and mutual trust among people within a community). This relation is more pronounced in cases where information asymmetry problems are more severe and is robust to using alternative measures of key variables, addressing endogeneity issues, employing alternative model specifications, and simultaneously estimating leverage and short-term debt. An analysis on debt structure (bank loans vs. public debt) shows consistent results. Our findings are in line with the idea that social capital lowers the need for corporate borrowing mechanisms as a means to alleviate agency problems for firms.

Introduction

The capital and debt structures of a firm can affect its value in many ways. One particular channel is through how they alter managerial incentives and impact investment decisions (Jensen and Meckling, 1976). In this regard, finding the optimal levels of leverage and debt maturity involves trading off the benefits and costs associated with them. For instance, using more leverage and shortening debt maturity can both alleviate problems that arise from management entrenchment (Harris and Raviv, 1990; Jensen, 1986), but at the same time introduce shareholder-creditor conflicts and liquidity risk, respectively, in addition to financial distress (e.g., Johnson, 2003; Myers, 1977). 1 Thus, an economic variable that bears the function of substituting the benefits of leverage and short-term debt, thereby lowering the associated potential costs and allowing the reallocation of resources, can be valuable to the firm. In this paper, we hypothesize that social capital fits such a role. Following Guiso et al. (2004), we define social capital as the degree of altruistic tendency and the level of mutual trust among people within a community. Plainly speaking, high social capital regions comprise of individuals that are more trustworthy, more cooperative, and less self-centered (see, for instance, Hasan et al., 2017b; Jha and Chen, 2015; Jha and Cox, 2015). We propose that managers in these areas are less likely to misbehave or take actions that may harm investors. This can be due to their society reflecting who they are, shaping who they become, or forcing them to be more concerned about reputation losses before taking value-destroying actions (Mead, 1934, p. 178). Through each of these channels, the managers are more likely to be perceived by investors as trustworthy.

1- Introduction

2- Empirical methodology

3- Data and variables measurement

4- Empirical results

5- Conclusion

References

Abstract

We examine the effect of an exogenous increase in information asymmetry (as proxied by late filings of firms’ Form 10-K) on bond prices. We find that bondholders react negatively to a late filing announcement but this negative reaction is conditional on whether late filing firms appropriate wealth from bondholders through shareholder distribution. Moreover, we find that the impact of financial distress and covenants on bond values is mainly driven by the wealth appropriation from bondholders. The results are robust to difference-in-difference analysis using treatment (i.e., late filing) and control (i.e., non-late-filing) samples based on propensity score matching. The results provide evidence that shareholder distribution as a specific form of wealth appropriation from bondholders to shareholders has a significant effect on bond values when financial information is not timely provided to capital markets.

Introduction

It is well known that timely disclosure of periodic financial statement information helps capital market participants make informed investment decisions, which in turn decreases the information asymmetry between managers and investors (e.g., Glosten & Milgrom, 1985; Hakansson, 1977; Healy & Palepu, 2001). One such vital corporate disclosure is the firm’s annual financial filings with the SEC, i.e., the Form 10-K.1 Recent research on the equity side examining the consequences of an increase in information asymmetry caused by late disclosures of 10-Ks documents negative and significant equity market reaction (e.g., Bartov, Defond, & Konchitchki, 2015).2 In this paper, we investigate the effect of an exogenous increase to information asymmetry, as proxied by late filing of annual financial statements with the SEC, on bond values.3 We focus on the U.S. bond market for several reasons. First, the U.S. bond market is one of the largest capital markets in the world with over $9.8 trillion outstanding corporate bonds issued by U.S. firms as of end of 2013.4 Second, prior research suggests that the value of debt is less sensitive to asymmetric information than the value of equity because debtholders own a put option on the firm’s assets (e.g., Kerr & Ozel, 2015; Myers & Majluf, 1984). Hence, it is unclear whether the asymmetric information caused by late disclosures will have significant consequences in the bond market. Third, the U.S. bond market is dominated by institutional investors, and it is unclear whether bond investors will react to announcements of non-timely SEC filings if these institutional investors can have access to various information sources other than public financial filings (e.g., Defond & Zhang, 2014; Ronen & Zhou, 2013) that can help them anticipate the late filing before it actually occurs. Fourth, announcements of non-timely filings of financial statements may not necessarily trigger bond values downward because late filing firms may agree with bond investors to delay the release of their financial statements by, for example, giving bondholders more leverage over the firm’s assets.5 Finally, prior research finds that late filing firms are on average smaller, more levered, with lower market to book and profitability (e.g., Bartov et al., 2015). These firms are usually in serious default risk and bondholders may have already priced in such a high level of information asymmetry. Therefore, the findings on the consequences of an increase in information asymmetry caused by late filings previously documented in the equity market may not necessarily hold in the bond market.

1- Introduction

2- Theory and hypotheses

3- Data and methods

4- Main results

5- Additional analysis

6- Conclusion, discussion and contribution

References

Abstract

This paper investigates the role of intellectual property rights (IPR) protection on the cost of bank loans for firms in 48 countries. Using substantial reforms of patent rights as a source of identifying variation, the paper provides strong evidence that borrowers from countries that underwent IPR reform experience significant reductions in the cost of bank debt. Importantly, the effects of IPR reform on loan rates are significantly larger in industries that are more IP-intensive. Additional analysis shows that in the wake of reforms borrowers obtain larger size loans, which indicates that improvements in IPR are associated with greater credit availability. IPR reform also increases foreign lenders participation in loan syndicates. Overall, these findings suggest that legal protection afforded to intellectual property has a significant impact on the cost of corporate borrowing and the ability of innovative firms to raise debt capital.

Introduction

Intellectual property rights (IP, IPR) increasingly play a crucial role in the knowledge-based global economy by shaping firms’ incentives to develop new technologies. Although there are certainly many factors that influence innovation, scholars and practitioners have long recognized that granting exclusive legal rights to IP holders can play a particularly powerful role in providing incentives for firms to develop proprietary knowledge (see, for example, Nelson (1959), Arrow (1962)). The main argument for such government intervention is that IP, that underpins innovation and knowledge, is largely intangible in nature and therefore hard for owners to protect from expropriation by competitors. Underscoring the importance of IP protection to business activity, the real effects of IPR is now one of the most active research areas in economics and finance (e.g., Branstetter et al., 2006; Bilir, 2014; Galasso and Schankerman, 2015; Lerner, 2002; Qian, 2007). While the literature has extensively examined the relation between IPR regimes and firm innovative and trade activities, we know relatively little about the effect of IPR protection on the supply and cost of external financing to corporations. This omission is surprising because a firm’s ability to obtain external financing is crucial for its operations and performance. Documenting such indirect effects of IPR is also crucial to our understanding of the costs and benefits of policy reforms. The contribution of this paper is to provide a novel evidence on whether and how legal reforms that strengthen IPR affect the cost of bank loans extended to corporate borrowers around the world. Understanding the effect of IPR protection on bank financing is important because bank credit is the most important source of external capital to firms around the world (e.g., Demirgüç-Kunt and Levine, 2001).

We investigate whether CFO debt-like compensation incentives and their alignment with CEO debt-like compensation incentives are associated with financial reporting quality. He (2015) finds that CEO debt-like compensation incentives are associated with higher financial reporting quality. Consistent with agency theory, we extend He (2015) by considering CFO debt-like compensation incentives. Overall, we find that CFO debt-like compensation incentives are associated with better financial reporting quality while controlling for CEO debtlike compensation incentives. These effects are present when the CEO and CFO compensation incentives are aligned with the same party. Further, the CFO effect dominates that of the CEO when examining discretionary accruals, and complements the CEO effect for accrual quality. However, we are unable to find any evidence of an incremental joint effect from the alignment of the CEO and CFO debt-like compensation incentives.

Introduction

We investigate whether CFO debt-like compensation incentives and their alignment with that of the CEO are associated with financial reporting quality. Agency theory suggests that managers’ equity (inside debt) holdings can align managers’ actions with shareholders’ (debtholders’) interests (Jensen & Meckling, 1976). Prior literature focuses on the role of individual managers’ equity-based compensation incentives and, more recently, CEO’s debt-like compensation incentives on financial reporting quality (e.g., Armstrong, Jagolinzer, & Larcker, 2010; Cheng & Warfield, 2005; Feng, Ge, Luo, & Shevlin, 2011; He, 2015). These studies document a negative (positive) relationship between CEO equity-based (debt-like) compensation and financial reporting quality. However, both the CEO and CFO of U.S. public firms are responsible for financial statement quality. While prior research shows the CFO equity incentives are associated with poorer financial statement quality, we extend this research by examining whether CFO debt-like incentives affect financial reporting quality. We further examine whether there is a joint effect when the CEO and CFO debt-like compensation incentives are aligned. Firms provide their executives incentive plans that are aligned with either shareholders or debtholders. Alignment with debtholders provides executives incentives to reduce information asymmetry and enhance financial reporting quality. He (2015) and Dhole, Manchiraiu, and Suk (2016) find evidence consistent with this expectation using CEO debt-like compensation incentives. We expect a similar relationship to hold for CFO debt-like compensation incentives because the CFO has a greater opportunity to influence financial reporting quality.