The Deliberation Process of Accounting Standards and Loan Spreads: Evidence from SFAS 141 and 142

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Abstract

This paper examines the effects of the deliberation process of SFAS 141 and 142 on loan spreads and financial covenants. I find that spreads are significantly higher for industries with significant goodwill balances when the loan is issued during the deliberation process. This increase in loan spreads almost doubles the spread difference before the deliberation process between industries with significant goodwill and those without. However, this increase in loan spread did not persist into the period after the standards issuance. Furthermore, I find a significant reduction in the use of capital covenants that are based on balance-sheet items, for industries with significant goodwill during but not after the deliberation process. Overall, these findings suggest that the different stages in the process of establishing accounting standards can have differential impacts on loan spread and covenants.

Author

• He Wen, University of Missouri-St Louis