Accounting Quality and Debt Concentration
Ningzhong Li, Yun Lou, Clemens A Otto, and Regina Wittenberg-Moerman (2020) Accounting Quality and Debt Concentration. The Accounting Review. DOI/10.2308/tar-2017-0250, Forthcoming
52 Pages Posted: 2 Dec 2014 Last revised: 13 Jul 2020
Date Written: March 21, 2020
We examine the relation between accounting quality and debt concentration in corporate capital structures (i.e., firms’ tendency to rely predominantly on only a few types of debt). Motivated by theoretical and empirical research that supports a strong link between debt concentration and creditors’ coordination costs and the importance of accounting quality in reducing these costs, we hypothesize that firms with higher accounting quality have less concentrated debt structures. Measuring accounting quality with a comprehensive index based on the occurrence of material internal control weaknesses, accounting restatements, SEC AAERs, and firms’ reliance on small auditors, we find that higher accounting quality is indeed associated with less concentrated debt structures. This relation is stronger for firms with higher default risk, as the probability that creditors need to coordinate is higher, and for firms with lower liquidation values, as creditor coordination to avoid liquidation is more important.
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