Author
Abstract
This paper examines the effect of accounting quality on the inclusion of a specific debt contract feature, the borrowing base restriction, which limits the borrower’s access to the credit line by the amount of its working capital assets. The quality of the working capital, in turn, becomes relevant to the choice of borrowing base restrictions. I argue that private monitoring of working capital decreases the effect of publicly available accounting information in debt contracts. I find that borrowers with low accounting quality, measured as low accrual quality, are more likely to access borrowing base lines of credit, as they face high adverse selection costs in non-borrowing base lines of credit. Accordingly, I show that the effect of accounting quality on the cost of debt is diminished in borrowing base lines of credit as compared to non-borrowing base lines of credit. Further results show that the diminishing effect of accounting quality in borrowing base lines is mainly due to the discretionary portion of accrual quality, rather than the innate portion. Moreover, based on the narrative length of borrowing base restrictions specifically written on eligible accounts receivables in loan contracts, I construct a borrowing base restrictiveness measure and find that the effect of accounting quality on the cost of debt is decreasing with the restrictiveness, supporting the substitution effect between contractual monitoring mechanisms and borrower accounting quality.
Suggested Citation
Sunay Mutlu, 2020.
"Accounting quality and the choice of borrowing base restrictions in debt contracts,"
Accounting and Business Research, Taylor & Francis Journals, vol. 50(2), pages 135-178, February.
Handle:
RePEc:taf:acctbr:v:50:y:2020:i:2:p:135-178
DOI: 10.1080/00014788.2019.1683440
Download full text from publisher
As the access to this document is restricted, you may want to search for a different version of it.
Corrections
All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:acctbr:v:50:y:2020:i:2:p:135-178. See general information about how to correct material in RePEc.
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
We have no bibliographic references for this item. You can help adding them by using this form .
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RABR20 .
Please note that corrections may take a couple of weeks to filter through
the various RePEc services.