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Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective

59 Pages Posted: 13 Oct 2015 Last revised: 10 Jun 2016

Hans Bonde Christensen

University of Chicago - Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Regina Wittenberg Moerman

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: February 29, 2016

Abstract

This paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers. Its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research. We argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved. By discussing its rich theoretical implications, we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency.

Keywords: Financial contracting, incomplete contracts, accounting-based covenants, control allocation, contracting on accounting information

JEL Classification: G32, G34, M40, M41

Suggested Citation

Christensen, Hans Bonde and Nikolaev , Valeri V. and Wittenberg Moerman, Regina, Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective (February 29, 2016). Journal of Accounting Research, 54, 2016. Available at SSRN: https://ssrn.com/abstract=2673609 or http://dx.doi.org/10.2139/ssrn.2673609

Hans Christensen

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Valeri Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

Regina Wittenberg Moerman

University of Southern California ( email )

Los Angeles, CA 90089
United States

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