Credit supply and contracting on hard information in debt markets
This paper examines the impact of fair value accounting on debt contracting, covenant usage, and credit supply in financial institutions.
What it examines
Using fair value accounting changes as a natural experiment, this study examines how increased managerial discretion over financial information affects loan contracts. Focusing on financial firms, it compares public and private borrowers and employs difference‐in‐differences and triple‐differences methods to evaluate changes in balance sheet covenant use.
What it concludes
Fair value adoption reduced balance sheet covenant use and limited credit supply, especially for firms with many mark‐to‐model assets. These findings suggest that regulatory changes in financial reporting can reshape loan contracts and lending behavior, guiding policies for banks, regulators, and improved risk management.
Evidence objects
The paper finds that fair value accounting adoption reduces balance sheet covenants in financial institutions while income statement covenants remain unchanged, due to discretion over Level $3$ assets heightening frictions.
key_findings bullet 1 · key_findings · validation V0
Using rigorous difference-in-differences, triple difference, and treatment intensity estimators, the study separates screening and contracting channels while introducing Level $3$ asset reliance as a novel measure of hard debt information.
key_findings bullet 2 · key_findings · validation V0
Surprisingly, borrowers with high managerial discretion face fewer covenant violations as managers adjust valuations; robust loan data support findings, though regulatory shifts and crisis effects may limit generalizability, urging interpretation.
key_findings bullet 3 · key_findings · validation V0
This paper leverages a natural experiment from the fair value hierarchy to examine how hard balance sheet information shapes debt contracting and credit supply. Contrasting public financial firms with private counterparts and applying $\text{DiD}$ and triple differences methodologies, it presents novel, empirically robust insights into contractual frictions and lending dynamics.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
No abstract available.
Source row: 471 · abstract type: unknown