Debt Contracts and the Need for Mandatory Accounting Changes ...

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correlated with both the frequency and the characteristics of the new accounting standards. Thus, cross-sectional analysis further strengthen our interpretations. We focus on characteristics that reflect the importance of the changes in accounting standards. We expect the positive relation between the exclusion of GAAP changes and the frequency of new accounting standards to be stronger for more substantial changes to accounting standards. We examine three characteristics of accounting standards. The first characteristic is the implementation period, defined as the number of days between the issuance of a new accounting standard and the date it became effective. A longer implementation period indicates that a standard is more complex and therefore requires a longer time to implement. The second characteristic of the accounting standards is their length, i.e., the number of pages. Presumably, more significant accounting standards tend to be longer. The third and final characteristic is the number of times that the media refer to the accounting standard. More significant standards are also more likely to receive greater media coverage. We measure media coverage by the number of articles in Factiva that mention the name of the accounting standard. We measure the relevance of each (of the three) characteristics for a particular contract by computing its average over the term of the loan. We then split the sample of credit agreements at the median for each characteristics such that one of the subsamples is subject to more significant accounting standard changes than the other subsample. Table 6 reports the results of probit regression analysis. In all three partitions, we find that the frequency of GAAP changes predicts the likelihood of their exclusion. However, this association is stronger when the accounting standards are more important, i.e., have longer implementation periods, more pages, and wider media coverage. The differences are statistically significant for the implementation period and the length of the accounting standards but not for media coverage. The relations 23
etween contracting practices and both the frequency and the characteristics of accounting standards further suggest that characteristics of new accounting standards have contributed to the downward trend in the inclusion of GAAP changes in credit agreements. Overall, the evidence in this section is in line with our prior interpretations that standard setters have shifted their focus away from contracting considerations. Specifically, consistent with standard setters’ actions contributing to the decline in contractual reliance on GAAP changes, the decline is related to the frequency and attributes of changes in accounting standards. 16 4.4. Additional analysis: Unconditionally frozen GAAP vs. GAAP frozen-on-request In Section 4.1, we identified GAAP frozen-on-request as a contracting practice that has not been documented in prior work (e.g., Leftwich 1983, Beatty et al. 2002). This new practice is becoming increasingly popular (see Figure 1) and differs from the other two practices in that it provides the contracting parties with a valuable option to exclude GAAP changes. Although GAAP-frozen-on-request and unconditionally frozen GAAP are economically similar (which is why we group them together in our main analysis) they differ at least in two important respects. First, when both lenders and borrowers agree that a new accounting standard is desirable, GAAP-frozen-on-request will automatically roll over the contract to new GAAP without the need for costly renegotiation. In contrast, under unconditionally frozen GAAP, adopting a GAAP change would require a vote among lenders. In syndicates in which lenders have limited interactions, the renegotiation costs can be considerable. Second, if lenders lose incentives to 16 An alternative explanation for the trend is changes to contracting costs over time. Beatty et al. (2002) argue that the exclusion of GAAP changes increases contracting costs (e.g., double bookkeeping costs). Under this assumption, it is plausible that reduced contracting cost due to new technology may contribute to the trend. However, if reduced contracting costs were the sole explanation for the trend there is no reason to believe that the frequency and characteristics of new accounting standards should explain the trend as we find. 24
Page 1 and 2: Debt Contracts and the Need for Man
Page 3 and 4: one of the parties to renege on the
Page 5 and 6: preceding arguments suggest, this r
Page 7 and 8: explanation is that the approach to
Page 9 and 10: 2. Conceptual Underpinnings and Hyp
Page 11 and 12: acting in their own interest, can e
Page 13 and 14: standard setters may also interfere
Page 15 and 16: the distribution of contracts by ye
Page 17 and 18: Table 3 presents the means conditio
Page 19 and 20: consolidation requirements. Curbing
Page 21 and 22: Second, and more importantly, the m
Page 23: whereas the trend toward excluding
Page 27 and 28: to indicate whether the loan is des
Page 29 and 30: References Aghion, P. and P. Bolton
Page 31 and 32: Appendix A: Examples of Contracting
Page 33 and 34: Figure 1. Contracting Practices wit
Page 35 and 36: Figure 3. Contracting Practices wit
Page 37 and 38: Table 1. Sample Selection and Contr
Page 39 and 40: Table 3. Means Classified by the In
Page 41 and 42: Table 5. Contracting Practices and
Page 43: Table 7. The Sequential Choice of C

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