Fair Value Accounting and Debt Contracting: Evidence from Adoption of SFAS 159

55 Pages Posted: 22 Dec 2013 Last revised: 6 Apr 2016

See all articles by Peter R. Demerjian

Peter R. Demerjian

University of Washington - Michael G. Foster School of Business

John Donovan

University of Notre Dame - Department of Accountancy

Chad R. Larson

University of Houston - Department of Accountancy & Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

We examine how fair value accounting affects debt contract design, specifically the use and definition of financial covenants in private loan contracts. Using SFAS 159 adoption as our setting, we find that a small but significant proportion of loans (14.5%) modify covenant definitions to exclude the effects of SFAS 159 fair values. Only a limited number of these modifications exclude assets elected at fair value (less than 7%), while all exclude liabilities elected at fair value. Notably, we document that covenant definition modification is unassociated with ex-ante fair value elections. We find that covenant definition modification positively varies with common incentive problems attributed to fair value accounting and negatively varies with benefits attributed to fair value accounting. Contrary to prior evidence, our results suggest that fair value accounting is not uniformly detrimental for debt contracting and that fair value adjustments are included when they are most likely to improve performance measurement.

Keywords: fair value accounting, debt contracting, SFAS 159, fair value liabilities

JEL Classification: M41, G32

Suggested Citation

Demerjian, Peter R. and Donovan, John and Larson, Chad Russell, Fair Value Accounting and Debt Contracting: Evidence from Adoption of SFAS 159 (September 2015). Available at SSRN: https://ssrn.com/abstract=2370920 or http://dx.doi.org/10.2139/ssrn.2370920

Peter R. Demerjian (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Chad Russell Larson

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

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