Drs. Charlene Spiceland and Joseph Zhang Accepted for Publication
For release: September 22, 2015
Dr. Charlene Spiceland and Dr. Joseph Zhang, assistant professors in the School of Accountancy, recently had their paper entitled "Accounting Quality, Debt Covenant Design, and the Cost of Debt," accepted for publication in Review of Quantitative Finance and Accounting. The paper was coauthored with Dr. L.Y. Yang, University of Miami.
In this paper, the authors examined whether debt covenant design (threshold tightness, covenants frequency, covenant interdependence, and overall covenant strictness) reduced the adverse effect of poor accounting quality on the cost of debt in the private lending market. They predicted and found that when borrowing firms exhibit low accounting quality, lenders tended to increase interest rates as well as increase debt contract strictness through debt covenant design (e.g., increasing the number of covenants, decreasing covenant interdependence or including covenants with greater threshold tightness). Moreover, the results indicated that the cost of debt for borrowers with low quality accounting is significantly influenced by financial reporting quality, but that covenant strictness helped mitigate adverse information risk and its influence on interest rates. These findings have important practical implications for firm managers and lenders.