14 Financial Accounting 7: Debt Market Research (Including Credit Ratings/Debt Contracts)

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    Long-run Performance of Debt Renegotiations: Large-Sample Evidence
    ( 2020-08-16) Xiang, Tracy ; Wang, Wei ; Basu, Sudipta
    We examine the long-run performance of over 16,000 debt renegotiations. We find that, compared with non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms deliver 13% (20%) higher stock returns over the three (five) years following the renegotiation. This renegotiation effect is strongest for waivers and for amendments to loan interest rates and financial covenants. Renegotiations lead to improvements in accounting-based performance measures including return on assets, cash flow from operations, and financial distress. Consistent with incomplete contract theory, our evidence shows that renegotiations alleviate ex-post inefficiencies in credit agreements and produce long-term gains for the borrower.
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    How do tax risk factor disclosures affect the cost of debt?
    ( 2020-08-15) Axelton, Zhuoli
    This study investigates the effects of qualitative tax risk disclosures on the pricing of syndicated loans. The tax risk factor disclosures represent management's qualitative assessments of firms' potential losses upon challenges by tax authorities. They may contain information incremental to the quantitative tax avoidance and tax volatility measures reported in the financial statements and tax returns lenders may obtain through private communication channels. I find that firms with more extensive tax risk disclosures enjoy lower loan spreads, suggesting that tax risk disclosures enhance information transparency not only between lenders and borrowers but also between lead arrangers and participants in loan syndicates. This effect is more pronounced for firms with lower quality information environments and higher IRS audit risk. I also find that tax risk disclosures signify management's ability to manage tax risks, which provides greater assurance to lenders, as evidenced by lower future tax volatility and lower contracting costs of tax avoidance. Overall, I provide empirical evidence on how tax risk disclosures affect the cost of debt in the syndicated loan market.
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    Accounting Restatements and Debt Contract Renegotiation
    ( 2020-08-15) Xia, Jie ; Zhang, Xiu-Ye
    This study investigates the impact of accounting restatements on the existing debt contract. Based on a sample of borrowing firms with restatements for the period from 2000 to 2018, we manually construct a novel dataset on debt contract renegotiation. We find that restating firms have a higher likelihood of renegotiation than the firms without restatements. Our examination on how initial contract terms are renegotiated in the post-restatement period shows that, unlike tightening restrictions that new creditors are more likely to react with, creditors in relationship are willing to provide financial flexibility in respond to borrowers' restatements as they are bonded with borrowers' interests, and may perceive the value of long-term customer relationship higher than the potential borrower risk arising from a restatement. Further analysis on restatement severity shows that existing creditors are less likely to relax the original loan terms, if the restatements involve fraud or revenue recognition issues, suggesting that creditors are willing to provide support to debtors only to the extent that the benefits are bilateral. Our findings suggest that renegotiation is a trade-off between bonding interests in existing contracts and creditors' protection against debtors' risk associated with restatements. To our knowledge, this paper is the first to examine the implications of accounting restatements on the renegotiation of existing debt contracts.
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    Firm Life Cycle and Cost of Debt
    ( 2020-08-14) Amin, Abu ; Bowler, Blake ; Hasan, Mostafa ; Lobo, Gerald ; Tresl, Jiri
    This paper examines the relation between the corporate life cycle and lending spreads. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find that lending spreads follow a U-shape pattern across the life cycle phases. This pattern is in addition to the variation explained by typical controls. In a multivariate analysis, we find that firms in the introduction and decline phases pay lending spreads that are greater than firms in the mature phase (differences of 6 percent and 12 percent, respectively). We explore omitted variables bias and instrumental variable estimation in robustness testing and find that the U-shape pattern persists. Our findings are consistent with theoretical predictions regarding the relationship between the corporate life cycle and various lending risks.
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    Climate risk and bank loan contracting
    ( 2020-05-20) Hrazdil, Karel ; Anginer, Deniz ; Li, Jiyuan ; Zhang, Ray
    We construct an event-based measure of climate risk based on firm-level environmental, social, and governance (ESG) incidents related to climate using data from RepRisk and investigate whether a borrower's adverse climate incidents affect bank loan contracting. Using a sample of 620 publicly traded US firms over the period 2007-2016, we are the first study to document that loans initiated after the occurrence of firms' first adverse climate-related incidents have significantly higher spreads, shorter maturities, more covenant restrictions, and higher likelihood of being secured with collateral. In cross-sectional tests, we find that intensity and influence of the adverse climate related incidents have a larger impact on the pricing of bank loans. Our results support the notion that banks incorporate firm-specific climate risks into their lending contracts.