Does Derivatives Privilege Affect Debt Contracting?

SYNOPSIS Proposed changes by the FASB and the IASB to lease accounting standards will substantially change the accounting for operating leases by requiring the capitalization of future lease payments. We consider the impact of these changes on firms' debt covenants by examining the frequency of income-statement- versus balance-sheet-based accounting ratios in debt covenants of firms in high and low Off Balance Sheet (OBS) lease industries. Based on debt contracts from the 1996–2009 period, our results provide evidence that lenders focus on balance sheet (income statement) ratios in designing debt covenants for borrowers in low (high) OBS lease industries. Further, the use of balance-sheet- (income-statement-) based covenants falls (rises) faster in high OBS lease industries than in low OBS lease industries as the use of OBS leasing increases. This evidence indicates that OBS operating leases influence lenders' use of accounting information in covenants, suggesting that creditors consider the impact of OBS leases when structuring debt agreements. These results also suggest that the proposed capitalization of OBS leases may not result in firms violating loan covenants but will make the balance sheet a more complete source of information for debt contracting by removing the need for constructive capitalization of OBS leases.

Download Full-text

Conditional Conservatism and Audit Fees

Accounting Horizons ◽

10.2308/acch-50928 ◽

2014 ◽

Vol 29 (1) ◽

pp. 83-113 ◽

Cited By ~ 17

Author(s):

Hye Seung (Grace) Lee ◽

Xu Li ◽

Heibatollah Sami

Keyword(s):

Corporate Governance ◽

Potential Benefit ◽

Audit Fees ◽

Accounting Conservatism ◽

Audit Risk ◽

Debt Contracting ◽

Conditional Conservatism ◽

Governance Quality ◽

Corporate Governance Quality ◽

The Impact

SYNOPSIS In this study, we examine the impact of conditional conservatism on audit fees and, more importantly, the influence of corporate governance on this relationship. Prior literature presents evidence regarding explanations for the existence and pervasiveness of accounting conservatism such as compensation and debt contracting, shareholder litigation, taxation, and accounting regulation. However, there is very limited evidence or discussion of the potential benefit of accounting conservatism on audit risk and thus audit fees, and how the potential benefit can be attenuated by corporate governance quality. Using a sample of firm-year observations over the period of 2004–2009, we provide evidence consistent with conditional conservatism and firms' commitment to such conservatism reducing their audit fees. However, our evidence shows that this reduction in audit fees is moderated by higher corporate governance quality. These results have implications for auditors, regulators, standard setters, and firms' managers. In addition, our study extends the literature on the determinants of audit fees. JEL Classifications: M41; M42; D81; D22.

Download Full-text

Rural land and credit markets, the permanent income hypothesis and proto-industry: evidence from early modern Zurich

Continuity and Change ◽

10.1017/s026841600700656x ◽

2007 ◽

Vol 22 (3) ◽

pp. 489-518 ◽

Cited By ~ 5

Author(s):

ULRICH PFISTER

Keyword(s):

Life Course ◽

Labour Force ◽

Permanent Income ◽

Land Markets ◽

Permanent Income Hypothesis ◽

Major Objective ◽

Debt Contracting ◽

The Family ◽

The Life Course ◽

Empirical Material

ABSTRACTThe study documents fluctuations of proto-industrial income, of occupation, debt and presence on land markets across the life course for rural households in a major proto-industrial region during the seventeenth and eighteenth centuries. These fluctuations are interpreted on the basis that a major objective of households is to equalize their income across different stages of their development. The permanent income hypothesis is then extended to take into account land purchases and debt-contracting that result from the need to adjust land and capital to fluctuations in the size of the family labour force across the family cycle and from endeavours to improve the family's welfare by increasing the labour to land ratio. The empirical material presented shows marked fluctuations of income from proto-industrial work across the life course and suggests the existence of permanent income-cum-accumulation strategies to cope with these fluctuations.

Download Full-text