Accounting information and debt markets

Lou, Yun (2012) Accounting information and debt markets. Doctoral thesis, University of London: London Business School.

Abstract

This thesis contains five chapters. The first chapter provides an introduction and the last chapter a brief conclusions. In the second chapter, I examine the impact of litigatons contingency disclosure in a 10K/Q filing on a defendant firm's choice of debt, and its effect on the design of a public debt contract. I find that defendant firms that withhold information about litigation contingencies are more likely to access the private debt market, whilst those disclosing litigation contingencies tend to borrow from the public debt market. When firms access the public debt market, the disclosure of litigation contingency is associated with higher yields and a higher likelihood of including default clauses that pertain to court judgments in the bond indentures. However, conditional on disclosure, firms with a higher level of disclosure are rewarded with lower yields. The third chapter empirically tests the certification hypothesis by studying the roles of reputable auditors and bank underwirters in the design of bond contracts. It provides evidence that reputable auditors and underwiters help corporate bond issuers obtain lower bond yields. The effect of reputable underwriters in terms of economic magnitute and significance, consistent with auditors' multiple roles as information intermediaries, monitors and insurance providers. The presence of of reputable auditors and underwriters also affects bonds' nonpricing terms. Firms that hire reputable auditors obtain longer term bonds, whereas those that engage reputable underwriters can issue larger bonds. The fourth chapter examines the importance of default clauses in debt contracts and investigates the determinants of these contractural features. Default clauses are contractual provisions in debt contracts that specify the events that trigger the repayment of the debt principal and the transfer of control rights to debtholders. This chapter provides evidence that the restrictiveness of default clauses in both loan and bond contracts predict firm bankruptcies one and two years ahead, indicating that these clauses are not boilerplate. We also find that firms with higher expected costs of bankruptcy, as proxied by firm-specific intangible assets at the time of debt issuance, receive fewer restrictive default clauses. This effect is particularly strong in the case of bond agreements.