13 Financial Accounting 7: Debt market research (including credit ratings/Debt contracts) (FAR7)
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ItemInternational Evidence on the Effects of a Local Presence by U.S. Credit Rating Agencies( 2021)Major U.S. credit rating agencies are criticized for failing to understand developments in other economies and thereby impeding capital access by assigning lower ratings. Consistent with this, we nd that Moody's and S&P credit ratings are more favorable after the agencies establish a local presence in the rated issuer's country of domicile. The results appear to be driven by a decrease in negative adjustments applied to model-predicted ratings, indicating that rating analysts become more condent with their quantitative model outputs after a local presence. Positive adjustments also increase, suggesting that analysts become more willing to assign higher than model-predicted ratings. Subsequent evidence suggests that, after the local presence, rating increases are not merely catering to local economies but become more informative as evidenced by their negative association with future credit risk premium and probability of default. Our findings inform the debate on the regulation of credit rating agency markets around the world.
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ItemPublic Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants( 2021)In this study, we examine the interplay between public environmental enforcement and private lender monitoring and its effects on borrowers’ environmental activities. To capture lender environmental monitoring, we use environmental covenants in loan agreements that require borrowers to take environmental remedial actions, disclose adverse environmental events, or conduct environmental audits. We predict and find that, in the presence of higher regulatory enforcement intensity, loan agreements are more likely to include environmental covenants when loans are secured by real property versus non-real property and when borrowers belong to more polluting industries. We further find that after loan initiations, borrowers with environmental covenants in loan contracts have lower toxic chemical releases when they are located in states with higher regulatory enforcement intensity. Taken together, our study suggests that public environmental enforcement reinforces lenders’ environmental monitoring that has positive externalities in shaping borrowers’ environmental activities.
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ItemWhat If borrowers were Informed about Credit Reporting? Two Randomized Field Experiments( 2021)Using two randomized field experiments, we examine how warning borrowers that their loan performance will be reported to a public credit registry affects their loan take-up and repayment decisions. We show that credit warnings increase loan take-up rates. The main drivers appear to be anticipation of reduction in incumbent lenders’ informational rents and improvement in access to informal or formal credit. Moreover, credit warnings reduce default rates by 3.7–5.9 percentage points. This reduction is comparable for borrowers who receive the credit warning before and after the loan take-up, which suggests that credit warnings have little net effect on borrowers’ credit-risk composition due to selection.
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ItemCFO facial beauty and bank loan contracting( 2021)We test whether facial attractiveness of borrower firms’ chief financial officers (CFOs) influences bank loan contract terms, using a machine learning-based face beauty evaluation algorithm. We document that firms led by CFOs with greater facial beauty receive more favorable loan contracts from their banks, evidenced by lower loan spreads, longer maturities, fewer covenants, and a lower likelihood of collateral requirements. We conduct robustness tests for selection bias and further show that the effect of CFO facial beauty on bank loan contracts is less pronounced among larger and older firms and among firms whose CFOs have longer tenure. Our results are robust to a variety of alternate specifications and tests. Overall, we demonstrate that facial beauty has a profound impact on CFOs’ job performance.