Contracting on GAAP Changes: Large Sample Evidence

Posted: 12 Mar 2018

See all articles by Hans Bonde Christensen

Hans Bonde Christensen

University of Chicago - Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2017

Abstract

We explore revealed preferences for the contractual treatment of changes to GAAP in a large sample of private credit agreements issued by publicly held U.S. firms. We document a significant time-trend toward excluding GAAP changes from the determination of covenant compliance over the period from 1994 to 2012. This trend is positively associated with proxies for standard setters’ shift in focus toward relevance and international accounting harmonization. At the firm level, borrowers facing higher uncertainty are more likely to write contracts that include GAAP changes, but these firms also show a more pronounced time-trend toward excluding GAAP changes. While this evidence is broadly consistent with an efficiency role for GAAP changes in debt contracting, it is also consistent with a shift in standard setters’ focus offering a partial explanation of why fewer contracts rely on GAAP changes in 2012 than in 1994.

Keywords: standard setting; GAAP changes; debt contracting; incomplete contracts theory

JEL Classification: M4; G32

Suggested Citation

Christensen, Hans Bonde and Nikolaev, Valeri V., Contracting on GAAP Changes: Large Sample Evidence (December 1, 2017). Journal of Accounting Research, Vol. 55, No. 5, 2017. Available at SSRN: https://ssrn.com/abstract=3136023

Hans Bonde Christensen

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Valeri V. 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

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