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1.1 What Are Accounts For? Overview The purpose of accounts is to reveal performance in the conduct of a business or other activity concerned with use of economic resources (e.g. a club). It is thus a matter of stewardship. Although, like economics, it is necessary in accounting to use money as a measure of performance, it is concerned with the individual organisation rather than with economic phenomena as a whole.

The purpose of this paper is to investigate the association between the purpose of a loan and the type of debt covenants, separated into balance sheet-based and income statement-based covenants.

Using private loan deal observations obtained from the DealScan database over the period between 1996 and 2013, the authors classify the sample loan deals into three categories based on the purpose of borrowing, namely, borrowings for corporate daily operating purposes, financing purposes and acquisition and investing purposes. The authors conduct multinomial logistic regression analysis to test the relationship between the choice of financial ratios in a debt covenant and the purpose of a loan, controlling for financing constraints and other factors that have been identified as important to debt covenant analysis in prior studies.

The results provide evidence that the purpose of the loan is significantly associated with the type of debt covenants, suggesting that the lender and the borrower have considered the loan purpose when structuring their debt agreements. More specifically, the results indicate that the loans borrowed to fund acquisitions or long-term investment projects are more likely to have income statement-based covenants and less likely to have balance sheet-based covenants. In contrast, the loans borrowed for corporate daily operating purposes or financing purposes are more likely to contain balance sheet-based covenants relative to income statement-based covenants.

The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency. The results are limited to the US market with its institutional structure. In future studies, it would be interesting to perform similar investigations on firms in other countries.

The findings contain important and economically significant implications indicating that loan lenders and borrowers agree to include different types of accounting information (that is, income statement- versus balance sheet-based financial ratios) in their loan covenants for different purpose loans.

Overall, the results provide important evidence regarding the connection between debt covenant structure and loan purpose. In doing so, it contributes to the literature on debt contract design (Dichev and Skinner 2002; Chava and Roberts 2008; Demerjian 2011; Christensen and Nikolaev 2012). Despite much interest in debt contract design, Skinner (2011) argues that there still exists incomplete knowledge of the economic factors that structure debt contracts. Income statement-based covenants depend on measures of profitability and efficiency and act as trip wires that transfer control rights to lenders when borrowing firms’ performance deteriorates. On the other hand, balance sheet-based covenants rely on information about sources and uses of capital and align interests between borrowing firms and lenders by restricting the borrower’s capital structure. The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency.

This study is the first to identify differences in trends over time for the use of income statement- and balance sheet-based covenants as it relates to different loan purposes. The authors build on prior research to examine the degree to which loan purpose is associated with the choice between income statement-based and balance sheet-based covenants.

Purpose – This chapter compares the stability of the U.S. Dual Banking system's two bank groups, national and state banks, in light of the current financial crisis. The goal of the chapter is to answer three distinct questions: first, is there a difference in the (balance sheet) fragility between the two groups and, second, to what extent has the balance sheet fragility of both groups changed after the escalation of the financial crisis beginning in August 2007? Building on that, the third question asks to whether or not the respective regulatory agencies of both bank groups are responsible for these changes in balance sheet fragility in light of the financial crisis.

Methodology – To answer these questions the chapter uses U.S. Call Report data containing full quarterly balance sheets and P&Ls of all U.S. commercial banks over the period 2005–2008. Anecdotal evidence as well as univariate and multivariate difference-in-difference methodology focusing on the immediate pre-crisis period Q1/2005–Q3/2007 and the crisis period Q3/2007–Q4/2008 are applied.

Results – Highly significant and robust results show that, ceteris paribus, national banks reduced their potential balance sheet fragility after the escalation of the crisis in August 2007 by reducing lending and liquidity creation stronger than state banks. Anecdotal evidence supports the empirical findings. Although both FDIC and OCC did not anticipate the adverse effects of the crisis, the OCC publicly showed an earlier reaction to liquidity-related problems than the FDIC.

Originality – The chapter is the first of its kind to analyze bank fragility around the escalation of the financial crisis and the role of the regulatory agencies. The chapter holds especially interesting policy implications in the light of the current discussion about the future regulation of the banking markets.

This paper aims to investigate the links between accounting values in Chinese listed companies’ balance sheets and the exposure of their fraudulent activities.

Every balance sheet account is proposed to be a potential vehicle to manipulate financial statements.

Other receivables, inventories, prepaid expenses, employee benefits payables and long-term payables are important indicators of fraudulent financial statements. These results confirm that asset account manipulation is frequently carried out and cast doubt on earlier conclusions by researchers that inflation of liabilities is the most common source of financial statement manipulation.

Previous practices of solely scaling balance sheet values by assets are revealed to produce spurious relationships, while scaling by both assets and sales effectively detects fraudulent financial statements and provides a useful fraud prediction tool for Chinese auditors, regulators and investors.

The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.

This study uses the incremental R-square approach as in Kim and Kross (2005) to examine how much lenders rely on income statement and balance sheet ratios as the degree of real earnings management increases.

As real earnings management affects mostly the income statement, the authors find that lenders rely less on income statement ratios in making credit decisions in the presence of real earnings management. The authors also find that lenders do not alter their reliance on balance sheet ratios when faced with real earnings management.

This paper is the first to study how lenders alter their reliance on financial statements in making credit decisions in the presence of real earnings management. The findings of this paper could help the regulators set standards to improve the usefulness of financial statements. The findings of this paper could also help practitioners (borrowers and lenders) understand how real earnings management affects credit decisions.

Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.

To analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.

Findings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.

The main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.

The empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

To measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.

Consistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.

This paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

This paper aims to use coordinated financial statements' system properties that include exogenous and endogenous variables to answer important questions. These questions include the following: What is the financial condition of the firm? What if there is a change in the firm's exogenous variable(s) – how will the financial condition of the firm change? And, how much of a change in the firm's exogenous variable(s) is required for the firm to reach its financial goal(s)?

This paper uses coordinated financial statements to construct solvency, profitability, efficiency, liquidity and leverage (SPELL) ratios to answer the question: what is the financial condition of the firm? It answers what-if questions by changing an exogenous variable(s) and recalculating SPELL ratios. It answers how-much questions by using Excel's Goal Seek algorithm to find the required change in an exogenous variable to reach a firm's goal.

The authors find that coordinated financial statements' system properties can be used to answer important what-is, what-if and how-much questions about the firm.

The usefulness of coordinated financial statements' system properties to answer what-is, what-if and how-much questions about the firm depends – mostly on the accuracy of exogenous data used to represent the firm's external financial environment. Furthermore, the usefulness of what-if and how-much analysis depends on how appropriate the changes are in exogenous variables used to represent alternative scenarios.

Using coordinated financial statements' system properties to answer what-is, what-if and how-much questions provides the firm's financial manager the tools to not only asses the firm's current financial condition but also to assess its ability to respond to opportunities and threats posed by future scenarios.

The ability to assess the financial condition of a firm and to assess its strengths and weaknesses in key to making sound financial decisions. In addition, the consistency imposed on coordinated financial statements makes it an effective tool for discovering errors in its data.

The authors know of no similar work.

This paper aims to analyse the longitudinal performative effects of accounting, focusing on how accounting shapes the stability/instability of economic frames over time.

To explore the performative effects of accounting over time, a longitudinal case study narrates the transformation of a large, listed manufacturing company's financial strategy over 20 years. Using extensive document collection, the authors trace the shift from an “industrial” frame to a “shareholder value” frame in the mid-1990s, followed by the gradual entrenchment of this shareholder value frame until its decline in the wake of the financial crisis in 2008.

Our findings show how accounting has different performative temporalities, capable of precipitating sudden shifts between different economic frames and stabilising an ever-more entrenched and narrowly defined enactment of a specific frame. We conceptualise these different temporalities as performative moments and performative momentum respectively, explaining how accounting produces these performative effects over time. Moreover, in contrast to extant accounting research, the authors provide insight into the performative role of accounting not only in contested but also “cold” situations marked by consensus regarding the overarching economic frame.

Our paper draws attention to the longitudinal performative effects of accounting. In particular, the analysis of how accounting entrenches and refines economic frames over time adds to prior research, which has focused mainly on the contestation and instability of framing processes.