The Role of Financial Reporting in Debt Contracting and in Stewardship

Accounting and Business Research, Vol. 43, No. 4, pp. 362-383, 2013

38 Pages Posted: 25 Jul 2013

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2013

Abstract

In this review, I discuss how accounting numbers are used in contracts aimed at mitigating agency problems between shareholders and managers and between shareholders and debtholders. I highlight the reasons why accounting numbers are widely employed in these contracts, even though share prices provide more timely information on firm performance. Audited financial reports are shown to be important for effective board monitoring, as they enable senior executives to convey information to non-executive directors in a timely, but credible, manner. Debt contracts rely on accounting numbers to mitigate asymmetric information problems at inception of contracts as well as for subsequent monitoring. I then discuss the role of accounting conservatism and fair-value accounting in contracting and conclude that the current shift in standard-setters’ emphasis from financial reports providing verifiable backward-looking data to providing more valuation-relevant fair-value estimates is likely to lower the explicit use of accounting numbers in contracting.

Keywords: financial reports, conservatism, debt, fair-value accounting, stewardship, contracting

JEL Classification: M41, G30

Suggested Citation

Shivakumar, Lakshmanan, The Role of Financial Reporting in Debt Contracting and in Stewardship (May 31, 2013). Accounting and Business Research, Vol. 43, No. 4, pp. 362-383, 2013 , Available at SSRN: https://ssrn.com/abstract=2297784

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
450
Abstract Views
2,383
Rank
44,664
PlumX Metrics