This paper investigates whether and how the Sarbanes-Oxley Act (SOX) has changed the way that banks use accounting information to price corporate loans. SOX reformed corporate governance and disclosure, intending to improve reporting transparency. Financial reporting influences debt contracts, but accounting information valued by the shareholders may not provide the same decision usefulness to creditors. Measuring debt contracting value (DCV) with the association between key accounting metrics and bank loan interest spread, this study finds that, on average, the DCV of key accounting metrics has declined following SOX and that this decline (1) cannot be explained by firms that disclose deficiencies in internal control for financial reporting, (2) is largely driven by borrowers suspected of real earnings management, and (3) is attenuated by a large reduction in nonaudit services provided by the incumbent auditor. These findings suggest that SOX has mixed implications for accounting information's usefulness to creditors, who, although they welcome the reduction of auditor-provided nonaudit services, view the rise in real earnings management as a threat to accounting data's ability to inform credit risk.
Speaker: | Ms Shihong Li PhD Candidate, University of Houston |
When: |
10.00 am - 11.30 am |
Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
Contact: | Office of the Dean Email: SOAR@smu.edu.sg |