Accounting manipulation and loan contract terms

Abstract EN

We examine the impact of accounting information frictions on contracting efficiency.

More specifically, this paper investigates the relationship between real earnings management and both the structure of syndicated loans and the non-price loan terms.

This paper uses a sample of 24, 000 firm-year observations between 1996-2017.

The results suggest that loans to borrowers with higher real earnings management have fewer lenders.

In addition, we find that real earnings management is negatively associated with loan maturity and the number of financial covenants.

The results point to a necessary trade-off facing borrowers between the benefits of manipulating financial performance and strict contract terms.

The findings thus can be inferred that banks have superior information accessing and processing ability to eliminate the information asymmetries between borrowers and lenders, and banks react to real earnings management as detrimental to their future repayments with stricter loan terms, less number of lenders, and larger fraction of lead lenders' ownership.