TY - JOUR
T1 - Hedge commitments and agency costs of debt
T2 - Evidence from interest rate protection covenants and accounting conservatism
AU - Beatty, Anne
AU - Petacchi, Reining
AU - Zhang, Haiwen
PY - 2012/9
Y1 - 2012/9
N2 - We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing.
AB - We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing.
KW - Accounting conservatism
KW - Agency costs of debt
KW - Hedge commitments
KW - Interest rate protection
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U2 - 10.1007/s11142-012-9189-4
DO - 10.1007/s11142-012-9189-4
M3 - Article
AN - SCOPUS:84865419587
SN - 1380-6653
VL - 17
SP - 700
EP - 738
JO - Review of Accounting Studies
JF - Review of Accounting Studies
IS - 3
ER -