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The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports
Open accessAbstract
We examine the effect of financial reporting quality on the trade‐off between monitoring mechanisms used by lenders. We rely on Sarbanes‐Oxley internal control reports to measure financial reporting quality. We find that when a firm experiences a material internal control weakness, lenders decrease their use of financial covenants and financial‐ratio‐based performance pricing provisions and substitute them with alternatives, such as price and security protections and credit‐rating‐based performance pricing provisions. We also find that changes in debt contract design following internal control weaknesses are substantially different from those following restatements, where lenders impose tighter monitoring on managers’ actions, but do not decrease their use of financial statement numbers.
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Cites
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A review of archival auditing research
DeFond, M., & Zhang, J. (2014) · Journal of Accounting and Economics · doi:10.1016/j.jacceco.2014.09.002 · Cited by 3,188
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The role of information and financial reporting in corporate governance and debt contracting
Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010) · Journal of Accounting and Economics · doi:10.1016/j.jacceco.2010.10.001 · Cited by 1,494
Political Connections and the Cost of Bank Loans
HOUSTON, J. F., JIANG, L., LIN, C., & MA, Y. (2014) · Journal of Accounting Research · doi:10.1111/1475-679x.12038 · Cited by 705
The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms
MINNIS, M. (2011) · Journal of Accounting Research · doi:10.1111/j.1475-679x.2011.00411.x · Cited by 616
Metadata
- Authors
- COSTELLO, A. M., & WITTENBERG‐MOERMAN*, R.
- Venue
- Journal of Accounting Research
- Publisher
- Wiley
- Published
- 2010-12-06
- Volume
- 49
- Issue
- 1
- Pages
- 97-136
- ISSN
- 0021-8456 (ISSN-L)
- 1475-679X
- OpenAlex
- W3126000559
- Cited by
- 555
- References
- 79
- FWCI
- 67.53
- Type
- journal article
- Language
- en
- Open access
- green
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- COSTELLO, A. M., & WITTENBERG‐MOERMAN*, R. (2011). The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports. Journal of Accounting Research. https://doi.org/10.1111/j.1475-679x.2010.00388.x
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
