Seminario di Peter Pope

ore 12.30 Sala Seminari – I° piano, Palazzo Levi Cases, Via del Santo 33

30.05.2016

Balance sheet quality and public debt contracting (joint with: Hami Amiraslani, Ane M. Tamayo)

Seminario di Peter Pope, Department of Accounting Room, London School of Economics and Political Science

We examine the contracting relevance of balance sheet numbers in the corporate bond market. Using “accounting bloat” in net asset values as a proxy for balance sheet quality, we predict and find that aggregate covenant intensity in bond indenture agreements is negatively associated with balance sheet quality. The magnitude of this effect is more pronounced for accounting- and events-related covenants and is lower in the case of covenants that restrict dividend payout, refinancing, and investment activities. Results are robust to controlling for corporate governance quality and the stringency of delegated monitoring by private lenders in syndicated loan agreements. Turning to market outcomes, we find that offering yields, credit spreads, and initial credit ratings are decreasing in balance sheet quality, while the likelihood that credit rating agencies agree on ratings increases with balance sheet quality. To establish a causal link between balance sheet quality and the design of bond indentures, we exploit an exogenous court ruling in Delaware that substantially limits the fiduciary duties of directors to creditors. We show how this legal event affected bond issuers’ reporting incentives and altered the debt contracting relevance of balance sheet numbers.