A Positive Theory of Information for Debt Contracting: Implications for Financial Reporting

Debt contracting creates demand for information by lenders for several related but distinct decisions. Lenders gather information ex ante for screening the borrower. Lenders also collect information when the contract is in effect to assess the suitability of the initial contract terms. Finally, lenders monitor compliance with negotiated contract terms using information collected ex-post. In this study I examine these three decisions and discuss what features of information are useful to the lender within each decision context. These features include whether the information is hard or soft; whether it is predictive or reflective; and whether the information includes just persistent components or whether it also admits transient information. I continue by considering how publicly reporting financial information is potentially useful to the lender for each decision. I conclude by discussing potential avenues for future research suggested by this decision framework.