Knowledge that Transforms

I investigate whether and how syndicate size influences the type of covenants used in debt contracts. Prior theory and evidence suggest renegotiation considerations from coordination difficulties in large syndicates and intertemporal transfers due to relationship lending in small syndicates are factors in the design of covenants. I find that for large syndicates, borrowers and lenders avoid the use of flexibility-reducing covenants that are more likely to impact negatively on value-enhancing corporate policies in good states of the world. This effect becomes stronger when the borrower has fewer outside financing options. Additionally, I find contracts with large syndicates are more likely to have more covenant slack, include performance pricing provisions, have tailored capital expenditure covenants, and principally rely on covenants that are directly linked to the current performance of the borrower. Collectively, these results imply that syndicate size and related renegotiation considerations affect how accounting information is used in debt contracts.

Over the past several decades, the scope of public companies' operations has become increasingly global. This has led to concern over the ability of audit firms to conduct high-quality audits across geographically dispersed foreign operations. We contribute to the growing body of research in this area by investigating the association between audit quality and local audit offices' expertise in conducting multinational audit engagements. We use two complementary measures to proxy for an audit office's multinational expertise: (1) local multinational market leadership, and (2) country-specific experience. Using a sample of multinational client firms headquartered in the United States, we consistently find that audit quality is stronger when the auditor possesses expertise conducting global group audits, possesses particular expertise in the country where a client has a significant subsidiary, or possesses both types of expertise on an engagement. Several sample partitions reinforce our main results. The results are robust to propensity score matching, as well as a placebo test using clients of the audit office that generate no foreign sales. Our evidence suggests that the challenge of conducting multinational audits is more easily met by auditors with expertise on these types of engagements. JEL Classifications: M40; M42; F23. Data Availability: All data used are publicly available.

This study finds that better reporting quality is associated with less uncertainty about credit risk as captured by disagreement among the credit rating agencies. The results also show that reporting quality is more important in reducing uncertainty when debt market participants have less access to private information. To mitigate endogeneity concerns, I use the quasi-natural experiment induced by a change in accounting standards that improved reporting quality. Implementation of the standard led to less disagreement among the rating agencies. Overall, this study contributes to the literature on the impact of reporting quality on debt markets and intermediaries.

This study examines internal control weaknesses (ICWs) reported under Sarbanes-Oxley (SOX) Section 302 in the context of mergers and acquisitions. We predict that problems in an acquirer's internal control environment have adverse operational implications for acquisition performance. We argue that acquirers with low-quality internal information needed to select profitable acquisitions will make poorer acquisition decisions. We also argue that ICWs impede effective monitoring and are likely to hinder integration tasks that are important to acquisition profitability. We find that ICWs disclosed prior to an acquisition announcement predict significantly lower post-acquisition operating performance and abnormal stock returns. Poorer post-acquisition performance is concentrated in ICWs that are expected to impede acquisition activities (i.e., forecasting/valuation, monitoring, and integration). Our findings contribute to the literature linking ineffective internal control over financial reporting to negative operational outcomes. We also contribute to the SOX cost-benefit debate by documenting a previously unidentified benefit of ICW disclosures.

Lenders often have lending relationships with borrowers' major customers (labeled as “supply-chain lenders”). We hypothesize that private information obtained from borrowers' major customers can facilitate more timely and precise evaluation of borrowers' creditworthiness; this potentially reduces supply-chain lenders' reliance on accounting conservatism in debt contracting. Consistently, we find that suppliers borrowing from supply-chain lenders provide less conservative financial statements than suppliers borrowing from non-supply-chain lenders at loan origination. This finding is more pronounced when supply-chain lenders are likely to have greater information advantage over non-supply-chain lenders. Based on latent factors that proxy for private information accessible from customers, we find that supply-chain lenders' information advantage relates to customers' future operational and financial risks. Further, in lending agreements, supply-chain lenders accept fewer accounting-based contractual terms, lower spreads, and longer loan maturity than non-supply-chain lenders. The overall evidence suggests that borrowers' major customers represent an important information channel that enables lenders to more effectively screen and monitor borrowers, thus weakening the debt contracting demand for accounting conservatism.

We propose a new measure of accounting reporting complexity (ARC) based on the count of accounting items (XBRL tags) disclosed in 10-K filings. The preparation and disclosure of more accounting items is complicated because it requires greater knowledge of authoritative accounting standards. This aspect of complexity can increase the likelihood of mistakes, incorrect application of GAAP, and can ultimately lead to less credible financial reports. Consistently, we find that ARC is associated with a greater likelihood of misstatements and material weakness disclosures, longer audit delay, and higher audit fees. In comparison to commonly used measures of operating and linguistic complexity, the associations between ARC and these outcomes are more consistent, exhibit greater explanatory power, and have stronger economic significance. These and additional validation and robustness tests suggest that ARC more completely reflects accounting complexity. In addition, ARC exhibits several advantageous properties, including across- and within-firm variation, availability for the universe of SEC filers, and a direct connection to accounting, inherent in its derivation from detailed accounting disclosures. Finally, because it relies on a comprehensive set of detailed accounting data, ARC broadly captures accounting complexity, while, at the same time, it can be disaggregated into account-specific measures of complexity. JEL Classifications: M41; M43. Data Availability: Data are available from sources identified in the paper. A similar version of ARC, based on company XBRL filings that were downloaded directly from the SEC, is available at http://www.xbrlresearch.com.

Estimating expected credit losses on banks' portfolios is difficult. The issue has become of increasing interest to academics and regulators with the FASB and IASB issuing new regulations for loan impairment. We develop a measure of the one-year-ahead expected rate of credit losses (ExpectedRCL) that combines various measures of credit risk disclosed by banks. It uses cross-sectional analyses to obtain coefficients for estimating each period's measure of expected credit losses. ExpectedRCL substantially outperforms net charge-offs in predicting one-year-ahead realized credit losses, and reflects nearly all the credit loss-related information in the charge-offs. ExpectedRCL also contains incremental information about one-year-ahead realized credit losses relative to the allowance and provision for loan losses and the fair value of loans. It is a better predictor of the provision for loan losses than analyst provision forecasts, and is incrementally useful beyond other credit risk metrics in predicting bank failure up to one year ahead.

This study examines how the use of causal language in conveying relative performance feedback impacts subsequent task performance. Research in linguistics has shown that causal language, defined as language reflecting the search for reasons (commonly expressed through words such as “because” and “thus”), impacts how recipients process received information. We use a laboratory experiment to show that causal language has a differential effect when used in negative versus positive feedback. In the case where initial relative performance is low, the high use of causal language in the resulting negative performance feedback leads to a greater improvement in subsequent performance, compared to low use of causal language. Conversely, when initial relative performance is high, greater use of causal language in delivering positive feedback results in a smaller improvement in performance. Our results indicate that employees' cognitive processes and reactions to performance feedback are influenced by the language used in explanations.

We introduce a firm-specific measure of the technological aspect of competition—technological peer pressure—and examine firm-initiated product development-related press releases. We argue that empirical examinations of the theorized negative relation between competition and disclosure require the type of voluntary disclosure to be relevant to the dimension of competition under examination to ensure that firms incur significant proprietary costs of disclosure. In other words, many types of disclosure do not provide actionable information to competitors and, thus, should not be affected by that dimension of competition. We expect a negative relation between technological peer pressure and product disclosure because the latter reveals firms' strategies, allocations, and progress of technological investments in product development to competitors. In contrast, we do not expect a negative relation between technological peer pressure and management earnings forecasts—the most common type of voluntary disclosure used in accounting research. Our test results are consistent with these expectations. Data Availability: All data are available from public sources. Our TPP Measure is available for download, please see the link in Appendix G.

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn MailTo Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Dan Givoly, Gary C. Biddle; Financial Analysts and Their Contribution to Well-Functioning Capital Markets. The Accounting Review 1 September 2018; 93 (5): 359–362. https://doi.org/10.2308/accr-10622 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search