Secured Debt and Financial Reporting Quality: Evidence from Anti-Recharacterization Laws

• In Event: Debt Contracting I

Abstract

Using the staggered adoption of the anti-recharacterization laws by states within the U.S. as an exogenous shock to the benefits of secured debt, we examine the effect of the use of secured debt on firms' financial reporting quality. First, we show an increase in the use of secured debt after the passage of the laws. Second, we provide evidence that lenders reduce their demand for high quality financial reporting when loans are collateralized. Finally, we show as a result of the decline in the quality of financial reporting, lenders place less importance on the use of accounting numbers in pricing and in setting financial covenants in private debt contracts. Taken together we provide unique evidence that the inclusion of collateral and financial reporting quality act as substitutes in debt contracting.

Authors

• Thomas Bourveau, Hong Kong University of Science and Technology

• Yun Lou, HEC PARIS

• Christopher Williams, University of Michigan-Ann Arbor