Florin P. Vasvari

The Debt Contracting Value of Accounting Information and Loan Syndicate Structure

In this paper, we investigate how the fraction of the loan retained by the lead arranger of a syndicated loan deal is affected by the informativeness of the borrower’s accounting information relative to credit quality, after controlling for the direct use of accounting variables in the formal loan contract. We hypothesize that as the ability of publicly reported accounting numbers to capture changes in credit quality on a timely basis increases (i.e., debt-contracting value of accounting increases), lead arrangers will hold a smaller proportion of the syndicated loan deal. The idea is that when debt-contracting value of accounting increases, information asymmetry between the lead arranger and other syndicate participants is reduced, mitigating ex-ante adverse selection problems and reducing the incentive pressure necessary to induce lead arrangers to exert unobservable monitoring effort ex-post. Further, we hypothesize that accounting information with high debt-contracting value is relatively more important in reducing the proportion of the loan retained when the borrower is not rated, the lead arranger’s reputation is low, and when the lead arranger has not previously served as a lead arranger for the same borrower. We estimate a direct proxy for the debt-contracting value of accounting and document evidence consistent with both of our hypotheses. Finally, we exploit the existence of performance pricing provisions, a unique feature of syndicated loan contracts, to investigate how the debt-contracting value of accounting influences the choice of the performance measure used in these provisions. We predict and find that for loans that include performance pricing provisions, the likelihood that the single performance measure used in the provision will be an accounting ratio rather than a credit rating increases as the debt-contracting value of accounting information increases.

Corporate Tax Avoidance and Public Debt Costs

We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms’ private information and greater ability to monitor borrowers.

Equity cross-listings in the U.S. and the price of debt

Using a large panel from 46 countries over 20 years, we find that non-U.S. firms issue corporate bonds more frequently and at lower offering yields following an equity cross-listing on a U.S. exchange. Firms issue more bonds through public offerings instead of private placements and in foreign markets rather than at home, in both cases at significantly lower yields. Moreover, the debt-related benefits are concentrated among firms domiciled in countries with less private benefits of control, efficient debt enforcement, and developed bond markets, suggesting that equity cross-listings cannot completely offset the impact of weak home country institutions. The results support the notion that the monitoring, transparency, and visibility benefits brought about by equity cross-listings on U.S. exchanges are valuable to bond investors.

Debt Analysts’ Views of Debt-Equity Conflicts of Interest

We investigate how the tone of sell-side debt analysts’ discussions about debtequity conflict events affects the informativeness of debt analysts’ reports in debt markets. Conflict events such as mergers and acquisitions, debt issuance, share repurchases, or dividend payments potentially generate asset substitution or wealth expropriation by equity holders. We document that debt analysts routinely discuss these conflict events in their reports. More importantly, discussions about conflict events that we code as negative are associated with increases in credit spreads and bond trading volume. Consistent with the informational value of debt analysts’ discussions in secondary debt markets, we find that negatively coded conflict discussions predict higher bond offering yields in the primary bond market. In additional analyses, we measure the tone of debt analysts’ discussions based on their disagreement with the tone of equity analysts’ discussions and find that the informativeness of debt analysts’ reports is higher when our coding indicates that conflict events are viewed negatively by debt analysts but positively by equity analysts.

Media Coverage and the Stock Market Valuation of TARP Participating Banks

Abstract We examine the impact of media coverage of the Capital Purchase Program (CPP) under the Troubled Assets Relief Program on the equity market valuation of participating bank holding companies (CPP banks). We document substantial negative coverage of the CPP and its participants over the five quarters following the programs initiation. We find that the extent of negative media coverage about the CPP exerted substantial downward pressure on the stock returns of CPP banks, decreasing their valuation relative to bank holding companies not participating in the program. We show that our findings cannot be explained by differences in the banks’ financial viability at the CPPs initiation, new information about their performance being released to the market after the CPPs initiation or preceding stock returns causing the negative media coverage. Our findings highlight the importance of investor sentiment, as reflected by the tone of media coverage, in banks’ valuation during a period of high uncertainty in financial markets.

Corporate Loan Securitization and the Standardization of Financial Covenants

We examine whether syndicated loans securitized through Collateralized Loan Obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than non-securitized institutional loans. In addition, we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization alleviates information processing costs related to loan monitoring and screening. We also document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.

Debt Market Benefits of Corporate Diversification and Segment Disclosures

Theoretical arguments suggest that a firm’s diversification strategy affects its credit risk. The co-insurance theory argues that imperfectly correlated cash flow streams of a diversified firm’s segments reduce the variability of aggregated earnings, thus lowering the credit risk. In addition, the agency theory suggests that agency conflicts specific to diversified firms can increase or decrease the credit risk. We empirically test these theoretical predictions by investigating the effect of corporate industrial diversification on the cost of public debt financing. For a broad set of diversification measures and empirical specifications, we document significantly lower bond yields when firms diversify their operations. Further, we find that the negative relationship between diversification and bond yields is much more pronounced when firms diversify across unrelated industrial segments, and when diversification is associated with a lower inter-segment cash flow correlation, indicating that the results are more consistent with the co-insurance argument. This inference is further strengthened by our finding that the negative effect of diversification on the cost of public debt financing is also present in a sample of syndicated bank loans where agency problems are addressed through strong monitoring features rather than by adjusting the loan spread.

Similarity in Bond Covenants

We examine the economic consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s dataset on the quality of bond covenants, we develop measures that capture similarity in bond covenant terms by comparing the restrictiveness of a bond’s covenants with the covenant restrictiveness of previously issued peer bonds. Consistent with similarity in covenants reducing bondholders’ contracting and comparability costs, we document that bonds with more similar covenant restrictiveness receive significantly lower yields at issuance. These bonds are also characterized by greater liquidity in the secondary market and are more likely to be held by long-term bond investors, such as insurance companies. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings contracting and comparability cost savings that may be larger than the monitoring benefits provided by covenants with more tailored credit protection.

Debt Financing and Collateral: The Role of Fair-Value Adjustments

Using a novel dataset of business combination disclosures, we investigate whether fair-value adjustments (FVAs) of a target’s assets provide relevant information to lenders that allows the postdeal entity to enhance its borrowing activities. FVAs reflect the difference between the target’s book value of net assets and the fair value of these assets at acquisition date. We find that the average corporate acquirer reports FVAs on assets other than goodwill that reflect an economically significant increase of 60 percent in the value of the target’s total assets. We document that FVAs are associated with substantial new debt issuance by the combined firm during the three-year period after the acquisition. FVAs are also associated with the issuance of cheaper and longer term debt as well as debt that is secured and more likely to have balance sheet covenants. Consistent with these findings, we show that bond yields decrease during the period around the publication of FVAs. All results are driven by FVAs reported on the target’s tangible assets, the main set of collateralizable assets. This evidence indicates that fair value measurements around business combinations provide a certification role for the value of a target’s assets, improving lenders understanding of the collateralizable asset base. JEL Classifications: M41, G32, G34, G12Using a novel hand-collected dataset of business combination disclosures, we investigate whether fair-value adjustments (FVAs) of a target’s assets allow the acquiring firm to enhance its borrowing activities. FVAs are the difference between the fair value of the target’s net assets and their book value at the acquisition date. We find that the average corporate acquirer reports economically significant FVAs on assets other than goodwill, reflecting an increase of 60 percent in the value of the target’s total assets. We document that FVAs are associated with substantial new debt issuance by the acquiring firm during the three-year period after the transaction. FVAs are also associated with the issuance of cheaper, secured, and longer-term debt, which is also more likely to have balance sheet covenants. Our findings are driven by FVAs reported on the target’s tangible assets, which indicates that the shift from historical cost to fair value measurement around business combinations provides new information about the firm’s collateralizable asset base that is relevant to lenders.

Replicating the Investment Strategy of Buyout Funds Based in the United Kingdom with Public-Market Investments

This article assesses whether it is possible to emulate the risk-return profile of buyout funds with comparable public market investments, and concludes that the buyout fund sample used demonstrates a “performance delta” over mimicked public market investment. The performance of a sample of buyout funds is replicated by mimicking the risk characteristics of their transactions with public index data by precisely timing the funds’ cash inflows and outflows net of fees and carry, matching the investments by industry sector, and taking into account the effect of additional leverage replicating the typical financial risk of buyout transactions. The authors measure returns of four investment strategies: the buy-and-hold return on the broad public stock market index; the return on the broad public stock market index based on matched investment timing; the return on the broad public stock market index based on matched investment timing and with additional superimposed financial leverage; and the return on industry-matched public stock market indexes based on matched investment timing and with additional superimposed financial leverage. The authors compare the returns on these four investment strategies with the actual IRR performance of the buyout funds in our sample, which invested predominantly across Europe and through both rising and falling markets. They select sample funds that were raised before 2001 to minimize the measurement error associated with residual NAVs. This research shows that the mimicked public market investments fail to generate the same level of performance as the buyout funds in our sample. The buyout funds achieve performance 11.51% higher than the mimicked public market investments—a gap the authors call “performance delta.”