Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism
We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covena...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
Springer-Verlag
2014
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| Online Access: | http://hdl.handle.net/1721.1/87635 https://orcid.org/0000-0002-7469-9753 |
| _version_ | 1811094320188489728 |
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| author | Beatty, Anne Petacchi, Reining Zhang, Haiwen |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Beatty, Anne Petacchi, Reining Zhang, Haiwen |
| author_sort | Beatty, Anne |
| collection | MIT |
| description | We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing. |
| first_indexed | 2024-09-23T15:58:10Z |
| format | Article |
| id | mit-1721.1/87635 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T15:58:10Z |
| publishDate | 2014 |
| publisher | Springer-Verlag |
| record_format | dspace |
| spelling | mit-1721.1/876352022-10-02T05:24:46Z Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism Beatty, Anne Petacchi, Reining Zhang, Haiwen Sloan School of Management Petacchi, Reining We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing. Deloitte LLP 2014-06-04T19:38:37Z 2014-06-04T19:38:37Z 2012-06 Article http://purl.org/eprint/type/JournalArticle 1380-6653 1573-7136 http://hdl.handle.net/1721.1/87635 Beatty, Anne, Reining Petacchi, and Haiwen Zhang. “Hedge Commitments and Agency Costs of Debt: Evidence from Interest Rate Protection Covenants and Accounting Conservatism.” Review of Accounting Studies 17, no. 3 (September 2012): 700–738. https://orcid.org/0000-0002-7469-9753 en_US http://dx.doi.org/10.1007/s11142-012-9189-4 Review of Accounting Studies Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Springer-Verlag SSRN |
| spellingShingle | Beatty, Anne Petacchi, Reining Zhang, Haiwen Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title | Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title_full | Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title_fullStr | Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title_full_unstemmed | Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title_short | Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism |
| title_sort | hedge commitments and agency costs of debt evidence from interest rate protection covenants and accounting conservatism |
| url | http://hdl.handle.net/1721.1/87635 https://orcid.org/0000-0002-7469-9753 |
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