The Effects of Mandatory IFRS Reporting on the Syndicated Loan Market
Posted: 3 Aug 2011
Date Written: August 1, 2011
In this paper, we examine how the mandatory adoption of International Financial Reporting Standards (IFRS) affects ownership structure and debt covenants in the syndicated loan market. We hypothesize and document that the proportion of the loan retained by syndicate lead arrangers increases after a borrower adopts mandatory IFRS reporting. Further, we document that foreign lenders are relatively less likely to be involved in syndicated loan deals after the adopting of mandatory IFRS reporting. Finally, we find that syndicate lenders are less likely to use financial covenants in debt agreements after the mandatory IFRS adopting. Overall, these results are in line with the “surface comparability” argument by Schipper (2003). Specifically, the adoption of a principles-based accounting system (e.g., IFRS), characterized by limited interpretation and implementation guidance, will increase the difference in professional judgment among parties to debt contracts, which in turn reduces lenders’ and borrowers’ demand for accounting information in signing debt contracts.
Keywords: International Financial Reporting Standards (IFRS), Syndicated Loans, Debt Contracts, Covenants, Home Bias
JEL Classification: G15, G30, M41
Suggested Citation: Suggested Citation