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Article: The effects of firm-initiated clawback provisions on bank loan contracting

TitleThe effects of firm-initiated clawback provisions on bank loan contracting
Authors
Issue Date2013
PublisherElsevier. The Journal's web site is located at http://www.elsevier.com/locate/jfec
Citation
Journal of Financial Economics, 2013, v. 110, p. 659-679 How to Cite?
AbstractAlthough firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in suboptimal activities (e.g., reduce research and development (R&D) expenses) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find that banks use more financial covenants and performance pricing provisions in the loan contracts and decrease interest rates after firms initiate clawbacks. Moreover, we also find that loan maturity increases and loan collateral decreases subsequent to clawback adoption. Taken together, our findings indicate that firm-initiated clawback provisions enhance financial reporting quality, thereby reducing the information uncertainty that financing providers face.
Persistent Identifierhttp://hdl.handle.net/10722/197653
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorChan, LHLen_US
dc.contributor.authorChen, KCWen_US
dc.contributor.authorChen, TYen_US
dc.date.accessioned2014-05-29T08:36:09Z-
dc.date.available2014-05-29T08:36:09Z-
dc.date.issued2013en_US
dc.identifier.citationJournal of Financial Economics, 2013, v. 110, p. 659-679en_US
dc.identifier.urihttp://hdl.handle.net/10722/197653-
dc.description.abstractAlthough firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in suboptimal activities (e.g., reduce research and development (R&D) expenses) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find that banks use more financial covenants and performance pricing provisions in the loan contracts and decrease interest rates after firms initiate clawbacks. Moreover, we also find that loan maturity increases and loan collateral decreases subsequent to clawback adoption. Taken together, our findings indicate that firm-initiated clawback provisions enhance financial reporting quality, thereby reducing the information uncertainty that financing providers face.en_US
dc.languageengen_US
dc.publisherElsevier. The Journal's web site is located at http://www.elsevier.com/locate/jfecen_US
dc.relation.ispartofJournal of Financial Economicsen_US
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in <Journal title>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL#, ISSUE#, (DATE)] DOI#en_US
dc.titleThe effects of firm-initiated clawback provisions on bank loan contractingen_US
dc.typeArticleen_US
dc.identifier.emailChan, LHL: lchan@business.hku.hken_US
dc.identifier.authorityChan, LHL=rp01048en_US
dc.identifier.doi10.1016/j.jfineco.2013.08.010en_US
dc.identifier.hkuros228820en_US
dc.identifier.volume110en_US
dc.identifier.spage659en_US
dc.identifier.epage679en_US
dc.identifier.isiWOS:000326991600009-
dc.publisher.placeUSAen_US

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