Accounting Changes and Debt Contracting

Posted: 17 Apr 2017 Last revised: 30 Apr 2017

See all articles by Masako N. Darrough

Masako N. Darrough

Baruch College - CUNY

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Date Written: April 16, 2017


This paper examines whether firms benefit, in debt contracting, from committing to incorporate future GAAP changes (referred to as rolling GAAP) or not to incorporate any future changes (referred to as frozen GAAP). We show that informative future accounting changes do not necessarily improve the efficiency in debt contracts. We develop a parsimonious model to examine the interplay between the firm's investment decision made ex ante and the accounting information revealed ex post the rule change. These accounting changes enable the creditor to observe an accounting signal about the project state. Firms rationally anticipate such a signal and tailor investment decisions accordingly. If asset substitution is sufficiently severe, accounting changes unambiguously reduce the firm's expected payoff and the efficiency of debt contracting, even though they might reduce information asymmetry between the lender and the borrower. Under such a scenario, a firm would prefer not to incorporate future accounting changes.

Keywords: Information Asymmetry, Accounting, Debt Contracting

JEL Classification: G21, G32, M41, M48

Suggested Citation

Darrough, Masako N. and Deng, Mingcherng, Accounting Changes and Debt Contracting (April 16, 2017). Available at SSRN:

Masako N. Darrough (Contact Author)

Baruch College - CUNY ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646 312 3183 (Phone)
646 312 3161 (Fax)

Mingcherng Deng

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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