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Article
Publication date: 13 September 2021

Amira Houaneb, amira Houaneb, Rim Ben Hassen and Dorra Talbi

The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of restrictive covenants of public debt may affect accounting conservatism.

Design/methodology/approach

The sample is composed of non-financial firms and for each firm one debt contract is considered. The authors have used the Ball and Shivakumar (2005) models to test the relationships. All variables were retrieved from Mergent Fixed Investment Securities and COMPUSTAT Databases.

Findings

The findings of this study show that the more the firm relies on bond covenants, the higher is the degree of conservatism. The authors found also that these firms also exhibited a widely significantly increased level of conservatism in the years following the issuance of debt.

Research limitations/implications

The results should be interpreted with caution because the use of covenants does not take into consideration the tightness of their inclusion in the public debt contract.

Originality/value

This paper makes a timely contribution to the debate of timely loss recognition by confirming the complementarity between the inclusion of restrictive covenants in the debt agreement and the accounting conservatism before and after the emission of public debt.

Details

Journal of Financial Reporting and Accounting, vol. 21 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 14 June 2022

Hui Liu, Jiaqi Ning, Yue Zhang and Junrui Zhang

In an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a…

Abstract

Purpose

In an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a standard that requires auditors to disclose key audit matters (KAMs). This paper aims to explore the impact of the risk information provided by KAMs on corporate debt contracting.

Design/methodology/approach

In China, the KAM standard went into effect for A + H cross-listing companies in 2017 and became mandatory for all listed companies in 2018. This study takes this as an exogenous shock to examine the impact of the KAM disclosures on debt contracting. This study also designs a path analysis to open the “black box” between the risk information in KAMs and the risk perception of creditors. Moreover, This study conducts a textual analysis on the KAMs information based on samples after the release of the KAM standard.

Findings

This study conducts difference-in-difference tests and find that the KAM disclosures decrease interest rates and increase the proportion of long-term debt. Path analyses reveal that the KAM disclosures lead to more favorable debt characteristics through decreasing information asymmetry. This study also finds that the more KAMs are disclosed, the more favorable debt characteristics are and that different categories of KAMs have different effects on debt contracting.

Originality/value

This paper highlights the benefits of KAM disclosures, which are consistent with the convergence argument of risk information disclosures. Investors’ reactions to KAMs are mixed because of the differences in how professional investors and nonprofessional investors interpret information. This study provides evidence of incrementally informative nature of KAMs from the perspective of debt holders, who are professional information users.

Details

Managerial Auditing Journal, vol. 37 no. 6
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 17 May 2022

Hanan Hasan Almarhabi, Kamran Ahmed and Paul Mather

An important question is whether lenders perceive politically connected firms as having less or higher default risk, and thus provide them with more or less preferential loan…

Abstract

Purpose

An important question is whether lenders perceive politically connected firms as having less or higher default risk, and thus provide them with more or less preferential loan terms compared with non-connected firms. This paper aims to examine the relationship between political connections of corporate board members and cost of debt and loan contracting in the Gulf Cooperation Council (GCC) countries.

Design/methodology/approach

The initial sample comprises 288 GCC firm-year observations from 227 publicly listed firms in Oman, Qatar, Saudi Arabia and United Arab Emirates for the period from 2011 to 2015. It includes all the GCC publicly listed firms, excluding those in the financial, insurance and banking sectors because these entities are subject to different regulations. The ordinary least squares, logit regression and other sensitivity tests have been used to analyse the data and enhance reliability of the results.

Findings

This study finds that politically connected firms, particularly those connected through ruling royal family members, are associated with lower cost of debt, greater amounts of loans and longer-term government loans. Therefore, these findings support the prediction that political connections benefit GCC firms in the form of access to favourable terms from both government and commercial banks.

Originality/value

This study contributes to the extant literature by providing insightful analysis using unique political features of the GCC, integrated with agency and resource dependency theories. In particular, this study fills the gap in understanding the nature of loan contracting offered by government and commercial banks in the presence of politically connected boards within GCC setting.

Details

Journal of Accounting & Organizational Change, vol. 19 no. 1
Type: Research Article
ISSN: 1832-5912

Keywords

Article
Publication date: 5 September 2018

Siti Raihana Hamzah, Norizarina Ishak and Ahmad Fadly Nurullah Rasedee

The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.

Abstract

Purpose

The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.

Design/methodology/approach

This paper uses a theoretical and mathematical model to investigate whether incentives for risk taking exist in: debt contracts; and equity contracts.

Findings

Based on this theoretical model, it argues that risk shifting behaviour exists in debt contracts only because debt naturally gives rise to risk shifting behaviour when the transaction takes place. In contrast, equity contracts, by their very nature, involve sharing transactional risk and returns and are thus thought to make risk shifting behaviour undesirable. Nonetheless, previous researchers have found that equity-based financing also might carry risk shifting incentives. Even so, this paper argues that the amount of capital provided and the underlying assets must be considered, especially in the event of default. Through mathematical modelling, this element of equity financing can make risk shifting unattractive, thus making equity financing more distinct than debt financing.

Research limitations/implications

Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replaces debt, they must also be aware that imitative sukuk poses the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirrors bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities and promoting equity-based instruments.

Practical implications

This paper’s findings are relevant for countries that feature more than one type of financial market (e.g. Islamic and conventional) because risk shifting behaviour can degrade economic and financial stability.

Originality/value

This paper differs from the previous literature in two important ways, viewing risk shifting behaviour not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behaviour and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equityholders’ incentive to engage in risk shifting behaviour. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be controlled.

Details

Managerial Finance, vol. 44 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 11 February 2021

Moncef Guizani and Ahdi Noomen Ajmi

The purpose of this paper is to examine whether and how Islamic banks' financing affects corporate investment efficiency.

Abstract

Purpose

The purpose of this paper is to examine whether and how Islamic banks' financing affects corporate investment efficiency.

Design/methodology/approach

To achieve the research purpose, an empirical model was constructed to describe the relationship between Islamic banks' financing and corporate investment efficiency. The empirical model was tested through generalized method of moments (GMM) estimation technique using a panel data of 163 Malaysian listed firms for the period 2007–2017.

Findings

This study provides evidence that Islamic banks' financing plays an important role in enhancing investment efficiency and that this positive effect comes mainly from non-PLS contracts. Moreover, the results show that the effect of Islamic banks' financing in preventing suboptimal investments is stronger in the financial crisis period. The results also reveal that the contribution of Islamic banks' financing in reducing suboptimal investments is more prominent when firms face over-investment problems.

Research limitations/implications

This research contributes to the debate on the financial implications of Islamic banks' financing modes by exploring their effect on corporate investment efficiency.

Practical implications

From a managerial perspective, the research findings are beneficial to Islamic bank managers to the extent that they highlight the role of Islamic financial contracts in improving corporate investment efficiency. In addition, the lower effect of PLS contracts on investment efficiency implies that policymakers in Malaysia should multiply their efforts to further expand the PLS financing.

Originality/value

This paper offers some insights on the role of Islamic banks' financing in mitigating agency conflicts and reducing asymmetric information problems. It is the first attempt focusing on the role of Islamic financing in fostering corporate investment decisions.

Details

International Journal of Productivity and Performance Management, vol. 71 no. 5
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 26 September 2022

Chee Kwong Lau

This study aims to examine the economic consequences of, and managerial behaviour in response to, the introduction of IFRS 16 Leases. It extends the debt covenant hypothesis to…

Abstract

Purpose

This study aims to examine the economic consequences of, and managerial behaviour in response to, the introduction of IFRS 16 Leases. It extends the debt covenant hypothesis to explain why firms reduce the use of operating leases with the introduction.

Design/methodology/approach

This study develops a model, based on operating leases as an alternative financing source and the determinants of debt policy, to estimate the effects of gearing on operating lease intensity. High gearing is a proxy to probably closer to the violation of, or expected to violate, the gearing restriction in debt covenants given the retrospective capitalisation of operating leases, when IFRS 16 takes effect.

Findings

This study finds that operating lease intensity fell between 2011 (immediately after the first exposure draft leading to IFRS 16) and 2018 (immediately prior to the effective date of IFRS 16). It also finds that gearing affects changes in operating lease intensity over 2011 and 2018, consistent with the debt covenant hypothesis.

Research limitations/implications

The introduction of IFRS 16 is a natural experiment with unique characteristics (the active lobbying behaviour, ex ante evidence on adverse economic consequences, a prolonged standard-setting period, etc.) valuable for accounting research.

Practical implications

A showcase about the relevance of financial reporting for contracting interests of firms and managers and a good reference for accounting standard setters in considering and managing the economic consequences of proposed accounting standards.

Originality/value

This study adds to the limited research on the consequences of accounting standards and documents the ex-post impact on firm leverage ratios and the behavioural aspects of reporting entities.

Details

Journal of Applied Accounting Research, vol. 24 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 7 December 2020

Olanike Akinwunmi Adeoye, Sardar MN Islam and Adeshina Israel Adekunle

Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the…

Abstract

Purpose

Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the asset substitution problem – the agency cost of debt. Thus, there is a recognized need for models that can resolve the agency problem between the debtholder and the manager who acts on behalf of the shareholder, leading to optimal capital structure choice, and enhanced firm value. The purpose of this paper is to model the debtholder-manager agency problem as a dynamic game, resolve the conflicts of interests and determine the optimal capital structure.

Design/methodology/approach

As there is no satisfactory model for dealing with the above issues, this paper uses a differential game framework to analyze the incongruity of interests between the debtholder and the manager as a non-cooperative dynamic game and further resolves the conflicts of interests as a cooperative game via a Pareto-efficient outcome.

Findings

The optimal capital structure required to minimize the marginal cost of the agency problem is a higher use of debt, lower cost of equity and withheld capital distributions. The debtholder is also able to enforce cooperation from the manager by providing a lower and stable cost of debt and a greater debt facility in the overtime framework.

Originality/value

The study develops a new dynamic contract theory model based on the integrated issues of capital structure, corporate governance and agency problems and applies the differential game approach to minimize the agency problem between the debtholder and the manager.

Details

Journal of Modelling in Management, vol. 16 no. 4
Type: Research Article
ISSN: 1746-5664

Keywords

Open Access
Article
Publication date: 15 August 2019

Syed Munawar Shah and Mariani Abdul-Majid

The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory…

Abstract

Purpose

The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments.

Design/methodology/approach

The study conducts the following lab experiments bonus–incentive treatment without reputation, bonus–incentive treatment with reputation and trust–incentive treatment with reputation.

Findings

The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts. The principal pays higher salaries in the bonus contract as compared to an incentive contract.

Originality/value

The study contributes to the behavioral economic literature in the following dimensions. The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.

Details

Islamic Economic Studies, vol. 27 no. 1
Type: Research Article
ISSN: 1319-1616

Keywords

Article
Publication date: 1 October 2006

Andrew P. Cross

The purpose of this paper is to provide professionals in the global financial services industry with a useful summary of the proposed rules set out in April 2006 by two US…

188

Abstract

Purpose

The purpose of this paper is to provide professionals in the global financial services industry with a useful summary of the proposed rules set out in April 2006 by two US regulatory agencies – the Commodity Futures Trading Commission and the Securities and Exchange Commission.

Design/methodology/approach

The paper begins with background information regarding this regulatory structure and concludes with an overview of the proposed rules.

Findings

The issuance of these proposed rules is part of the continuing evolution of the regulatory structure in the US related to securities‐based futures contracts and is, therefore, best understood within that broader context.

Originality/value

The discussion of the proposed rules situates the continuing evolution of the securities‐based futures contracts in the broad context of the US regulatory structure.

Details

Journal of Financial Regulation and Compliance, vol. 14 no. 4
Type: Research Article
ISSN: 1358-1988

Keywords

Book part
Publication date: 28 December 2013

Dania Thomas

The social protests on the streets of indebted sovereigns in crises across the Eurozone have made debt restructuring an imperative. Further delay in achieving this expeditiously…

Abstract

The social protests on the streets of indebted sovereigns in crises across the Eurozone have made debt restructuring an imperative. Further delay in achieving this expeditiously and equitably significantly exacerbates the social costs of crises from which current and future generations will struggle to recover. This article examines the feasibility of the drastic and widespread debt restructuring needed to resolve the problem in the face of existing private law sanctions that protect individual creditor rights. It relies on an analysis of US policy in the transition to a securitized market and of key sovereign debt cases to reveal the historical contingency of private law protections. It concludes by showing that the effectiveness of private law protections have always been constrained by the overriding imperative to achieve debt sustainability with negotiated and consensual workouts. This can be achieved in the Eurozone with statutory constraints on enforcement action pending the settlement of debt workouts as suggested in a recent proposal.

Details

From Economy to Society? Perspectives on Transnational Risk Regulation
Type: Book
ISBN: 978-1-78190-739-9

Keywords

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