Do Cross-Country Differences in Accounting Standards Affect the Costs of Contracting?

• In Event: Effect of IFRS on Debt Markets
  In Paper Session: Economic Consequences of IFRS Adoption II

Abstract

This study examines the relation between contract-specified accounting standards and private lender country of domicile. The purpose of studying this relation is provide evidence regarding how cross-country differences in accounting standards affect lenders’ contracting costs. Prior studies provide evidence suggesting that equity investors’ information gathering and processing costs are related to differences in reported accounting standards. While lenders have access to private information about prospective borrowers, I document that US lenders are more likely to contract on US accounting standards that match their home country consistent with GAAP differences increasing lenders’ costs of screening and monitoring borrowers. These findings generalize to Canadian, UK, and IFRS-country lenders and suggest that lenders exhibit a preference for home-country GAAP. In additional tests, I examine whether the degree of difference between borrower- and lender-country accounting standards affects the likelihood that a debt contract from a US lender specifies US GAAP. I find that US lenders are significantly less likely to contract on US GAAP when a greater number of accounting rules differ between borrowers and lenders. Finally, I examine loan spread, maturity, and financial covenant use for loans from US lenders that specify US accounting standards and find no evidence that lenders’ preference for home-country GAAP affects other loan terms.

Author

• Bryan Graden, Illinois State University