Dare to play with fire? Managerial ability and the use of short-term debt

This study documents a positive relation between managerial ability and the use of short-term debt. This finding is robust to various specifications, including a difference-in-difference approach based on CEO turnovers. Able managers' preferences for short-term debt are amplified for firms with greater growth opportunities and are attenuated by firms' refinancing risk. Additional analyses shed light on the implications of high-ability managers' strategic use of short-term debt. Overall, the results presented in this study demonstrate that managers' innate ability plays a critical role in shaping corporate debt maturity structure.     

Discussion of “Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism”

Beatty, Petacchi, and Zhang investigate the role of two hedge commitment mechanisms??interest rate protection covenants and accounting conservatism??in reducing agency costs of debt. Using a large sample of syndicated loan agreements, they provide evidence that borrowers required to hedge interest rate risk through interest rate protection covenants receive lower interest rate charges. However, borrowers who voluntarily hedge interest rate risks receive lower rates only if they implement conservative financial reporting. The authors conclude that the benefits of hedging are realized only when borrowers can credibly commit to maintain hedge positions once a syndicated loan is issued. While the evidence provided by the authors is novel and interesting, I argue that the empirical assessment of hedge benefits is more complex. In addition, there are still some important open issues left unanswered that could be tackled by future research.     

Discussion of ‘The antecedents of the use of continuous auditing in the internal auditing context’

Gonzalez et al. (2012) apply the Unified Theory of Acceptance and Use of Technology (UTAUT, Venkatesh et al., 2003) to the issue of adoption of continuous auditing (CA) by internal auditors. The authors make a very convincing case for the slow evolution of CA and propose that this can be explained by the four factors contained in the UTAUT as well as annual sales and voluntariness of use. They find, in their revised model, that effort expectancy and social influence directly impact intentions to use the technology, while performance expectancy is moderated by annual sales and social influence is moderated by voluntariness of use. Interestingly, the authors also identify geographical differences in these influences. I offer commentary on these findings and suggest avenues for future research in the domain of technology adoption and use in accounting.     

The cost of firms’ debt financing and the global financial crisis

We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5500 issues over the period 2005–2012, we find that in recent years the sovereign debt market turbulence has been a major driver of corporate risk. Compared with the three-year period 2005–2007 before the global financial crisis, in the years 2010–2012 Italian, Spanish and Portuguese firms paid on average between 70 and 120 basis points of additional premium due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.     

Callable or convertible debt? The role of debt overhang and covenants

We analyze what role debt overhang and covenants have in a manager’s choice between issuing callable or convertible debt when a firm needs to issue a substantial amount of debt. Callable bonds provide a higher coupon in exchange for a repurchase option. Convertible bonds offer bondholders the option to exchange debt to equity. Using a dynamic capital structure model with investment choice, we find that callable debt implies a larger debt overhang friction, and for highly leveraged firms convertible debt is preferred. Moreover, if outstanding bonds have net-worth covenants attached, callable bonds are more likely to be issued. Our empirical findings support the theory.     

The effect of exchange rate fluctuations on multinationals’ returns

This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. manufacturing firms. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases slightly the number of significantly exposed firms. We also find that firms’ stock returns may be affected differently in periods of crisis and non-crisis; some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates.     

Board independence,internal information environment and voluntary disclosure of auditors’ reports on internal controls

When there is high information asymmetry between directors and managers, independent directors do not have enough information to perform their functions. Only when faced with a good internal information environment can such directors acquire enough information to provide advice and monitor managers, and only under these conditions can increasing their proportion on the board effectively reduce agency problems, such as driving managers to disclose information to investors. Using a sample of Chinese listed firms that voluntarily disclose their auditors’ reports on internal controls from 2007 to 2009, this study explores how the information acquisition costs of independent directors affect their monitoring effectiveness by investigating the disclosure decisions of their internal control audits. We find that when the information asymmetry between insiders and outside directors is low and the proportion of independent directors on a board is high, a firm is more likely to voluntarily disclose its internal control audit report.     

Entrepreneur’s incentives for risk-taking and short-term debt

We investigate the effects of short-term debt for entrepreneur’s incentives for risk-taking. To do so, we develop a model by introducing short-term debt and financing frictions into the entrepreneur framework. The more risk-averse entrepreneur overestimates the liquidity risk and undervalues the private equity, leading to higher incentives for risk-taking. Short-term debt mitigates the risk-shifting problem induced by the entrepreneur’s preference while generating additional risk-taking incentives via rollover risk. We consequently challenge the view of Seta et al. (2020) by predicting a trade-off between the two effects of short-term debt for entrepreneurs, offering a new perspective to harmonize the existing arguments.     

Family firms, debtholder�Cshareholder agency costs and the use of covenants in private debt

We ask whether the private debt contracts of family firms contain more restrictive covenants tied to accounting numbers than those of non-family firms. Our examination of Dealscan data indicates that credit agreements of Standard and Poor (S&P) 500 family firms are more likely to include accounting-based covenants that limit the lender(s)’ risk that managers will divert cash or assets to shareholders than those of S&P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. Our results suggest that lenders are more willing to rely on accounting-based covenants to solve the shareholder–private lender agency problem in family firms given that the reporting quality is higher due to better alignment of owner and manager interests in such firms.     

Do debt covenant violations serve as a risk factor of ineffective internal control?

Review of Quantitative Finance and Accounting - We examine whether debt covenant violations serve as an important determinant of material weaknesses in internal control over financial reporting....     

Sustainability of the accounting and finance academic profession: students’ and supervisors’ views about the PhD supervision process

This study explores the research supervisory practices of accounting and finance PhD students at Australian and New Zealand universities. Given documented faculty shortages in the accounting and finance disciplines, such investigation is timely and relevant. In the context of student engagement with their community of academic practice and their intrinsic motivation related to individual competence and autonomy, situational adjustments are inevitable and explain some differences between students’ perceptions and supervisors’ expectations. Our findings demonstrate that, despite general satisfaction with the PhD supervision process, students articulated concerns regarding constructive feedback and pastoral care provided by their supervisors, as well as guidance regarding data analysis/statistics.     

Controllers’ use of informational tactics

Controllers typically have a ‘dual accountability’ towards the finance function and operational management, respectively. This dual accountability at times confronts them with conflicting expectations. In this paper, we suggest that ‘informational tactics’ constitute an important resource which controllers rely on so as to handle these expectations and to successfully present themselves vis-à-vis their different internal stakeholders. Drawing upon interview data, we demonstrate that informational tactics relate to different dimensions of information control (i.e. ‘when’, ‘how’ and ‘what’ information is to be exchanged) and that they depend on the respective room for manoeuvre a controller has in a given situation. Overall, our analysis adds a more nuanced picture to the literature on controllers’ handling of information and demonstrates the fundamental role of informational tactics for their everyday work.     

Threat of entry and the use of discretion in banks’ financial reporting

This paper studies managers’ use of accounting discretion to deter entry. Using state-level changes in branching regulation under the Interstate Banking and Branching Efficiency Act, I find geographically-constrained community banks increased their loan loss provisions to appear less profitable when faced with the threat of entry by competitors. Additional tests rule out alternative explanations that firm economics or regulators drove the increase. I complement my analyses with survey-based evidence. Findings from the survey confirm that banks prefer to locate in markets where incumbents have high profitability and low credit losses, and that banks use competitors’ financial statements to analyze competition.     

An analysis of the consistency of banks’ internal ratings

Internal ratings-based models are used for a variety of important bank and regulatory decisions. Thus, model risk – the potential for different models to provide different probability-of-default (PD) estimates – is of crucial importance. Using a comprehensive German credit registry dataset from 40 banks and 17,000 corporate borrowers from 2008–2012, we assess the consistency of internal PD estimates across banks. We find three main results. First, the variability of PD estimates for the same borrower across banks is large. Second, bank fixed effects explain 5% of the variation in PD estimates across banks, while 95% of the variation is idiosyncratic. For the 10 largest banks in our sample, reported regulatory capital ratios would change by a maximum of ±10%, equivalent to approximately 1 percentage point, when using average risk weights from all banks instead of risk weights based on banks’ individual PD estimates. Third, we explore various bank characteristics that explain the size of bank fixed effects.     

Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

Review of Accounting Studies - Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated...     

New development: China’s debt transparency and the case of urban construction investment bonds

China’s true level of local government debt is unknown. The central government recently introduced policies to increase transparency and close some of the obscure financial instruments. Urban construction investment bonds (UCIBs) are one of the key instruments affected by these changes. Both positive and negative impacts can be expected. The issues the Chinese government is facing and its policy response provide important lessons for other governments.     

Quantifying the components of the banks’ net interest margin

Using unique data sets on German banks, we decompose their net interest margin and quantify the different components by estimating the costs of the various functions they perform. We investigate three major functions: liquidity and payment management for customers, bearing credit risk, and term transformation. For 2013, the costs of liquidity and payment management correspond, in the median, to 47% of the net interest margin, with bearing of credit risk and earnings from term transformation accounting for 12 and 37%, respectively.     

What do we know about the role of financial reporting in debt contracting and debt covenants?

The paper examines the role of financial reporting in debt contracting and in particular focuses on the definition, measurement, and monitoring of accounting-based covenants used to manage agency relationships arising from borrowing by firms. The paper also reviews research in areas of financial reporting where the presence of accounting-based covenants provides incentives to managers, notably choice of accounting method, lobbying on standard setters' proposals, and accounting earnings management. Although US dominated and latterly increasingly focused on large datasets and quantitative and analytical methods, relevant research is available from a range of methodologies and countries and the paper reflects this variety and identifies both inter-jurisdictional differences and inter-temporal changes in debt contracting practices. Despite the extensive research which is reviewed important areas for new research remain.     

Antecedents and outcomes relating to public and private nurses’ use of intuition in England

This paper examines public and private sector nurses’ use of intuition in England using structural equation modeling. Leader–member exchange (LMX) and perceived organizational support (POS) correlated positively with nurses’ perception of discretionary power and use of intuition. Nurses’ perception of discretionary power and use of intuition were positively correlated with their engagement. Further, differences were identified between private sector and public sector nurses in relation to the impact of workplace relationships (POS and LMX) and intuition onto perceived discretionary power and employee engagement. The results are important for all hospital managers seeking to foster employees’ use of intuition, perception of discretionary power, and engagement.