Evidence on the Determinants and Economic Consequences of Delegated Monitoring

61 Pages Posted: 10 Sep 2011

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Scott Liao

University of Toronto - Rotman School of Management

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 22, 2011

Abstract

We investigate delegated monitoring by examining the determinants and effects of including cross-acceleration provisions in public debt contracts. We find that cross-acceleration provision use depends on borrowers’ going concern relative to liquidation values, debt repayment structures, credit quality, and financial reporting quality. This suggests that the use of cross-acceleration provisions increases when the costs of cascading defaults are lower, the conflicts between creditor classes are higher, and the benefits of delegating monitoring to banks are higher. We also find a lower interest rate on public debt contracts with cross-acceleration provisions, but the rate reduction depends on borrowers’ financial reporting quality.

Keywords: cross monitoring, cross-acceleration provisions, debt covenants, accounting quality

JEL Classification: G30, M40

Suggested Citation

Beatty, Anne L. and Liao, Wei-Yi (Scott) and Weber, Joseph Peter, Evidence on the Determinants and Economic Consequences of Delegated Monitoring (August 22, 2011). Available at SSRN: https://ssrn.com/abstract=1908348 or http://dx.doi.org/10.2139/ssrn.1908348

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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