The Differential Impact of Financial Reporting Complexity on Public and Private Debt Contracting

Waqar Ali
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Waqar Ali: HEC Paris - Ecole des Hautes Etudes Commerciales

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Abstract: Institutional differences between public and private debt markets can impact how complexity in accounting rules affects debt contracting. Using the adoption of ASU 2017-12 that substantially simplified the reporting of hedging activities, I compare debt contracting outcomes arising from public bond issuers' and private loan borrowers' implementations of less complex hedge accounting. I find that consistent with their commitment to high reporting quality, bond issuers lower credit spreads by 13 – 22 basis points through effective hedging induced by the ASU. In contrast, private loan borrowers face 11 basis points higher loan pricing, and 50% greater balance-sheet covenants post-ASU adoption. I argue that when the ASU removes risk-relevant reporting requirements, information frictions increase for banks, increasing the agency cost of private debt; and hedging outcomes from private borrowers' ASU adoptions are insufficient towards offsetting the increased agency cost of debt. I extend the literature by documenting the heterogenous debt contracting effects of accounting rules' complexity, which has mainly been studied from the perspective of equity investors and analysts.

Keywords: Accounting Rules' Complexity; Hedge accounting; Financial risk management; Debt contracting; Public debt; Private debt; ASU 2017-12 (search for similar items in EconPapers)
Date: 2023-10-06
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04415300

DOI: 10.2139/ssrn.4594229

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