Does Recognition versus Disclosure Affect Debt Contracting? Evidence from SFAS 158

Forthcoming, The Accounting Review

54 Pages Posted: 12 Aug 2019 Last revised: 10 Aug 2023

See all articles by John Donovan

John Donovan

University of Notre Dame - Department of Accountancy

Andrew Stephen McMartin

University of Miami

Matthew Phillips

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 20, 2022

Abstract

We study how recognition versus disclosure affects pricing and control allocation in debt contracting. We examine whether loan spreads and the use of covenants changed around SFAS 158 adoption, which required recognition of previously disclosed pension liabilities. We find that pension underfunding is positively associated with loan spreads and negatively associated with the use of covenants prior to the adoption of SFAS 158. This is consistent with lenders viewing disclosed pension underfunding as insufficiently reliable for inclusion in covenants and instead pricing the risk associated with underfunding. Post-SFAS 158, pension underfunding is associated with lower spreads and a higher likelihood of using covenants relative to the pre-period. We find no change in the use of covenants unaffected by the accounting standard change or credit risk associated with underfunding post-SFAS 158. Collectively, the evidence is most consistent with recognition improving the reliability of accounting information for control allocation in debt contracting.

Keywords: disclosure, recognition, reliability, processing costs, pensions, debt contracting

Suggested Citation

Donovan, John and McMartin, Andrew Stephen and Phillips, Matthew, Does Recognition versus Disclosure Affect Debt Contracting? Evidence from SFAS 158 (June 20, 2022). Forthcoming, The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3434732 or http://dx.doi.org/10.2139/ssrn.3434732

John Donovan (Contact Author)

University of Notre Dame - Department of Accountancy ( email )

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

Andrew Stephen McMartin

University of Miami ( email )

Coral Gables, FL 33146-6531
United States

Matthew Phillips

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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