Financial Statement Comparability and Debt Contracting: Evidence from the Syndicated Loan Market

Abstract

In this study, we examine whether and how borrowing firms’ financial statement comparability affects the contracting features of syndicated loans. Using a sample of loans issued by U.S. public firms in the syndicated loan market over the period 1992–2008, we find strong and robust evidence that financial statement comparability is negatively associated with loan spread and the likelihood of pledging collateral, and positively associated with loan maturity and the likelihood of including performance pricing provisions in loan contracts. We also find that borrowing firms with greater financial statement comparability are able to complete the loan syndication process more swiftly, form loan syndicates enabling the lead lenders to retain smaller percentages of loan shares, and attract a greater number of lenders and particularly a greater number of uninformed participating lenders. Altogether, these findings are consistent with the view that financial statement comparability plays an important role in alleviating information asymmetry in syndicated loan market.

Keywords: debt contracting, loan syndication, financial statement comparability

JEL Classification: G12, G14, M41