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- Title
The Role of Accounting Information in Optimal Debt Contracts with Informed Lenders.
- Authors
Darrough, Masako N.; Deng, Mingcherng
- Abstract
We analyze the role of accounting information in debt contracting when the lender has private information that can assist in the borrower's investment decision. The lender might have acquired private information during the due diligence process or via past lending relationships. We show that the borrower has a stronger incentive to engage in a suboptimal investment decision (i.e., asset substitution) ex post when the lender lacks incentive to truthfully reveal this information. We identify conditions under which, ex ante, the borrower can incorporate accounting signals in the debt contract to mitigate the effect of the lender's private information and improve the borrower's investment efficiency. Our analysis offers an alternative explanation for the use of performance pricing in debt contracts. JEL Classifications: G21; G32; M41; M48.
- Subjects
DEBT; MONEYLENDERS; INFORMATION asymmetry; DUE diligence; INFORMATION resources; ACCOUNTING
- Publication
Accounting Review, 2019, Vol 94, Issue 6, p165
- ISSN
0001-4826
- Publication type
Article
- DOI
10.2308/accr-52313