THE EFFECT OF DEBT CONTRACTING ON VOLUNTARY ACCOUNTING METHOD CHANGES

Presented By:Ira geraldina

Intan OviantariNova Novita

Outline

Introduction Research Questions Hypothesis Development Methodology Results Sensitivity Analysis Conclusions

INTRODUCTION

Notes to Previous Researches It does not use the details of firms’

actual debt contracts assumes that contract calculations are based on current accounting methods

It focuses exclusively on debt covenants, ignores other accounting-based features of debt contracts, such as performance pricing

It focused on borrowers who were either close to violating or had already violated covenants

Beatty & Weber Research

Examine accounting methods changes on income increasing choices for firms that allows to do so by debt contract

Examine the effect of accounting based performance pricing as incentive to increasing income by changing accounting methods

Examine all accounting changing motivations

Primary Research Question

Specifics Research Questions Does allowing accounting changes to

affect debt contract calculations influence accounting choice?

Do the expected costs of covenant violations influence accounting choice?

Does performance pricing influence accounting choice?

Do dividend restrictions influence accounting choice?

Hypothesis Development (Q1)

H1

Hypothesis Development (Q2)

H2

Hypothesis Development (Q3)

H3

Hypothesis Development (Q4)

H4

Methodology-Research Design H1 & H2

Methodology-Research Design H3 & H4

Sample

• To Identify firms that change accounting method, We search all annual 10-K or quarterly 10-Q reports available on Lexis/Nexis from 1995-2000 for exhibit 18 disclosures.

• Then read each exhibit 18 report to determine whether the firm made a material accounting change.

• Table 1 describe the results of this sample selection process.

• We argue that our inferences are unlikely to be an artifact or sample selection bias for two reasons.

• First, we examine the types of accounting changes made by the firms we exclude. And the effects of these changes on net income, to ensure that our data requirements are not systematically related to our dependent variable. We conclude that our data requirements did not results in an endogenous sample bias.

• Second, we compare other characteristics or our sample firms and the exclude firms to ensure that our data these two groups of firm are not systematically different on other dimensions. We confirmed that these characteristics did not differ between the sample and exclude borrowers after partitioning on the accounting changes’ effect on net income.

Descriptive StatisticsTable 2 provides descriptive evidence on our

sample firm’s accounting method changes.

Results – Univariate Analysis

Correlation Among Independent Variables

Correlation Among Independent variables

Table 6

Support H1 (Table 6 Model 1)

Support H2 (Table 6 Model 1)

Support H3 (Table 6 Model 2)

Support H4 (Table 6 Model 2)

Table 6 Model 2

Management Compensation Incentive

Noncontracting Motives

External Parties

Sensitivity Analysis (Table 7)

Signed Magnitude of Income Effect

Debt Contracting Variable

Signed Magnitude of Income Effect (Table 7)

The Sensitivity of Rank Regression (Table 7)

Debt Contracting Variable

Debt Contracting Variable

Fact

Conclusions

Conclusions

Data Limitations