Debt Contracts, Loss Given Default and Accounting Information

40 Pages Posted: 2 Aug 2011 Last revised: 12 Feb 2018

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Edward Owens

University of Utah - David Eccles School of Business

Date Written: February 12, 2018

Abstract

We investigate an unexplored channel—loss given default—through which accounting information can shape the design of debt contracts. Using a sample of defaulted bonds, we find that borrower accounting information available at contract initiation possesses significant power for predicting realized loss given default at the subsequent default date. We then use this model to construct an accounting-based measure of expected loss given default at the contracting date for a large sample of bond issuances. We find that this measure is positively associated with issuance date interest spread and covenant use. We further document that the relation between accounting-based expected loss given default and contract terms is not an artifact of its association with probability of default. Our results increase our understanding of both the informational role and contracting role of accounting information.

Keywords: Debt contracts, Loss given default, Bankruptcy, Accounting information, Accounting quality

JEL Classification: G12, M40, M41

Suggested Citation

Amiram, Dan and Owens, Edward, Debt Contracts, Loss Given Default and Accounting Information (February 12, 2018). Available at SSRN: https://ssrn.com/abstract=1903721 or http://dx.doi.org/10.2139/ssrn.1903721

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Edward Owens

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

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