Accounting Inconsistency and Debt Contracting

In this study, I examine whether information frictions associated with changes in accounting policies (i.e., accounting inconsistency) impact debt contracting. I argue and provide evidence that firms with higher accounting inconsistency are more likely to obtain private (versus public) debt because private lenders are better able to mitigate information asymmetry. Additional analyses suggest that this result is driven by discretionary accounting changes as opposed to changes related to new accounting standards. Furthermore, I show that the association between accounting policy changes and debt placement decisions is concentrated among firms adopting accounting policies that are less consistent with those implemented by their industry peers. Consistent with the conjecture that accounting policy changes increase the information asymmetry between borrowers and potential lenders, I find that accounting inconsistency is associated with disagreement among credit rating agencies and affects the loan syndication process. Finally, I provide evidence that lenders adjust the credit terms (i.e., cost and amount of debt) in response to changes in accounting policies. Collectively, these findings add to the literature that examines the importance of financial reporting attributes for debt contracting.