Accounting Comparability and Loan Contracting

Measuring the Cost of Debt

Our main measure of debt cost is spread, the initial interest rate spread over
LIBOR for each loan. Prior research has shown that spread is an important measure
of the Agency's debt cost (Altman 1992; Liu, Seyyed, and Smith 1996; Zhang 2008;
Bharath et al. 2008; Beatty et al. 2008). The larger the spread, the higher the debt
cost. As an alternative measure of debt cost, we also use the interest rate on the
company's debt in the robustness 19 checks, measured as its interest expense for
the year divided by its total short- and long-term debt for the year (Ahmed et al.
2002; Pittman and Fortin 2004). This results in the following hypothesis (as
described in the alternative form): H1: The lower debt costs are correlated with more
comparable financial details. The study leading to H1 also indicates that the utility of
accounting comparability can depend on the availability of information and the use of
non-price terms in debt contracts in deciding the cost of debt. First, these cross-
sectional differences are discussed.
We therefore believe that the advantages in comparability of financial
statements in reducing the asymmetry of information between borrowers and lenders
are greater as there is less publicly accessible information on borrowers. Therefore,
we conclude that: H2a: The relationship between accounting comparability and debt
costs is greater (i.e. more negative), the less public knowledge about a borrower is
accessible.
We believe that the use of more restrictive non-price terms, including
leverage, financial arrangements and maturity, mitigates the negative correlation
between debt costs and comparability in accounting. This leads to the following
hypotheses: H2b: the relationship between accounting comparability and debt costs
is weaker (i.e. less negative) when debt collateral is committed; H2c: the relationship
between accounting comparability and debt costs is weaker (i.e. less negative) when
the maturity of the debt is shorter; H2d: the relationship between accounting
comparability and debt costs is weaker (i.e. less negative) when the maturity of the
debt is shorter;
Therefore, if accounting comparability increases the knowledge climate of
borrowers, we expect more lenders to be drawn to loans, and a smaller proportion of
loans to be able to be retained by lead lenders. This contributes to the following
hypotheses: H3a: The amount of lenders in loan deals is correlated favorably with
the comparability of accounting for borrowers. H3b: The proportion of loans owned
by lead lenders is negatively linked to the comparability of accounting for borrowers.
Accounting Comparability and Debt Cost
 Theoretically, the comparability of accounting reports will include the
comparative information of various firms or the comparative information of a specific
company to the creditors, investors and other stakeholders of the company in
various periods, help them compare the financial position and operating performance
of different companies or a certain company in different periods, and judge.
Therefore, the comparability of accounting knowledge has an impact on the cost of
resources of companies from a theoretical viewpoint. Yang Zhonghai et al. (2015),
Imhof et al. (2017), Xin Wang et al. (2018) From the viewpoint of equity capital cost,
scholars have confirmed: the equivalent performance of accounting details greatly
decreases the company's equity capital cost.Xin Wang et al(2018) further found out
that an alternative position in corporate governance can be played by comparability
of accounting data. And corporate governance will safeguard taxpayers and reduce
the cost of funding. Reviewing the literature, it is found that few researchers examine
the influence of comparability of accounting knowledge from the debt expense
viewpoint on the capital expense of firms.
Another big cause of borrower risks is also data asymmetry. Comparability of
accounting information may provide borrowers with comparative information from
various firms, thus reducing corporate credit risk volatility, reducing the pricing of
corporate credit risk by debt market members, and reducing the degree of
information asymmetry between debtors and other related undertakings, or reducing
the degree of comparative information between debtors and other similar
undertakings in different words. There is a long-standing anomaly in China's credit
market, namely that it is easier for state-owned enterprises than non-state-owned
enterprises to receive bank loans. While a number of property rights law reforms
have been carried out by China, they are not complete. The apparent benefits of
bank funding exist for state-owned companies, and the issue of financing problems
for non-state-owned enterprises is also bleak. In the one hand, state-owned
enterprises also serve the country's political planning and have some commonwealth
features relative to non-state-owned enterprises. In the other hand, state-owned
enterprises' land rights and economic interests belong to the state, and the individual
controllers of state-owned enterprises frequently lack adequate sense of duty and
direct economic interest in supervising executives, resulting in more severe
organization issues for state-owned enterprises and poorer comparability of
accounting records. High-quality external audit, on the one hand, can play a
supervisory role on management, thereby inhibiting the opportunistic actions of
managers and alleviating agency disputes with external creditors and investors; on
the other hand, high-quality external audit can enable businesses to more completely
report accounting records, significantly alleviating the degree of data asymmetry
between external creditors, investing As can be seen from the first subsection of this
chapter's analytical study, comparability of accounting knowledge is accomplished
largely by alleviating the interests of creditors.
 Accounting quality and terms of debt: Evidence from IFRS firms
Interest costs attributable to discounted long-term liabilities other than debt
Under IFRS, the current value of such long-term liabilities other than debt is
discounted, and the discount is discounted as an interest cost. The relationship
between interest costs and debt is skewed by this reporting and undermines the
comparability of businesses. As a result, Moody's reclassifies the cost of interest
resulting from discounting to operating costs. (In 2005, Moody's).
According to Moody's (2005), the aim of changes to financial statements is to
better represent the fundamental economics of transactions and events for
comparative purposes and to increase the comparability of the financial statements
of a company with those of its peers. S&P (Standard & Poor's, 2007) notes that the
objectives of particular adjustments can be classified into one or more of the
following
The latest rapid growth in the syndicated debt industry is being exploited in
several accounting efficiency studies. Sufi (2007) reveals that the composition of the
syndicate is influenced by information asymmetry. The lead arrangers hold a greater
portion of the loan while creditors are opaque, and form a more focused syndicate.
The lead arrangers indicate to the other syndicate members that they are
aggressively researching and tracking the applicant by raising their risk exposure to
the loan. Similar observations are reported by Ball et al. (2008). In addition, they find
that it helps to minimize the knowledge asymmetry issues between the lead arranger
and other syndicate partners because borrowers' accounting information has high
debt contracting importance (i.e. gives prompt and insightful signals about their credit
quality). As a result, lower proportions of loans will be owned by lead arrangers and
form a less centralized syndicate.
Many recent asset-pricing analyses indicate that high-quality accounting is
correlated with lower capital costs, consistent with the perception that the reporting
activities of a business will impact its debt contracting (e.g. Easley & O'Hara, 2004;
Lambert et al., 2011; Lambert et al., 2007; Leuz & Verrecchia, 2005). In addition,
empirical research shows that informationally opaque businesses are paying a risk
premium that is priced incremental to the default risk of the creditor (e.g. Bharath et
al., 2008; Francis et al., 2005; Yu, 2005). This leads to the first assumption: H1: High
accounting quality companies pay lower interest rates for their loans than low
accounting quality firms. The standard of accounting is therefore likely to influence
the terms of debt that are not valued. Shorter loan maturities cause more regular
debt refinancing and hence renegotiation of the terms of the debt deal (Wittenberg-
Moerman, 2009). This leads to the second hypothesis: H2: High accounting quality
businesses have longer debt maturities than low accounting quality companies.
Holders of secured securities are more covered than holders of unsecured debt if a
borrower faces financial hardship. As low-quality accounting statistics are less useful
in signalling improvements in the accounting quality of a borrower, I expect lenders
to need more collateral to compensate for this risk of knowledge. H3: Businesses
with good accounting standards are able to access loans with less securitization than
companies with poor accounting quality. This leads to the third hypothesis:
 The impact of financial reporting
quality on debt contracting: Evidence
from internal
We discuss in this chapter how the improvements in the configuration of the
debt contract after ICWs vary from the following restatements. Both ICWs and
ratings suggest that the financial reporting of a company is of poor consistency, but
there are three key variations between these phenomena. Next, restatements
typically stem from prior malfeasance or misreporting, and a restatement declaration
coincides with the clarification of figures previously recorded. ICWs, on the other
hand, suggest that the internal safeguards of the company are not adequate to stop
or track possible accounting errors. Second, restatements are frequently
synonymous with aggressive culpability in accounting and administration.
We equate the terms of loans issued in the transitional period before the ICW
announcement and the restatement to the terms of loans issued in the two-year
period following the restatement for companies who report an ICW before they
restate their financial statements. To be consistent with the average duration of the
transitional period, we limit the post-restatement period to two years. This means
that the gradual impact of restatements on loan terms relative to the effect of ICWs is
reflected by adjustments in the configuration of the debt contract after the
restatement.
We expect the ICW to increase the price of loans through two networks. Next,
the ICW limits the dependency of lenders on financial agreements. The hypothesis of
the department implies that a trade-off occurs between the number of deals and the
interest rate (Jensen and Meckling [1979], Myers [1977], Smith and Warner [1979]).
Therefore, an increase in the interest rate could compensate for a reduction in the
number of financial covenants. Second, with a spike in volatility, we expect an ICW
to influence the interest rate. Financial statements are an essential tool to convey
data to lenders and to promote the tracking of loans. A realistic risk of a material
error thus raises doubt about the creditworthiness of the company and thereby
increases the loan costs of the agency, which can be valued by lenders (Lambert et
al. [2007]). We also expect this greater ambiguity to translate into greater information
asymmetry between an organization and its lenders due to the information benefit of
management compared to lenders, which in turn could raise the interest rate
(Verrecchia [2001], Easley et al. [2002]). In line with our estimate, the interest rate on
loans issued during the uncorrected period has risen by 29 basis points compared to
the previous period, reflecting a rise of 11.4% in the interest rate.
 Our results are separate from those of Kim et al.[2009], which compares ICW
companies' loans to non-ICW companies' loans after the ICW disclosure. Kim et al.
[2009] suggest that company-level ICW loans have a slightly higher number of
financial agreements, which disputes our observation of a substantial decline in
financial agreements after announcement of an ICW. They also reveal that ICW
corporations' loans have a slightly higher percentage of general deals, a higher
interest rate, a greater chance of being guaranteed and a lower number of members
in the syndicate. We propose that while Kim et al.[2009cross-sectional ]'s study
design attributes discrepancies in loan terms between ICW and non-ICW companies
to an ICW disclosure, these differences may simply be attributable to differences in
more fundamental business features, such as riskiness and opacity of details. In an
untabulated review to discuss this idea, we analyze whether the terms of loans
granted to ICW companies previous to the ICW disclosure vary substantially from
those of loans provided to non-ICW companies. We find that loans from company-
level ICW companies have a larger number of financial and general agreements
compared to loans from non-ICW firms, are valued at higher interest rates, are more
likely to be insured and have a lower number of lenders even in the time preceding
the ICW disclosure. We therefore believe that the discrepancies identified by Kim et
al. [2009] between the loan contractual terms of ICW and non-ICW companies are
unlikely to be due to the effects of the disclosure of the ICW.