Accounting and contracting choices around a change in fiduciary duties
We exploit an influential 1991 Delaware court ruling to examine the impact of changes in managerial fiduciary duties on firms’ accounting and contracting choices. The ruling expanded directors’ fiduciary duties in favor of creditors and away from shareholders for a specific group of firms. Using a h...
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2017
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sg-smu-ink.soa_research-22972021-05-25T02:11:37Z Accounting and contracting choices around a change in fiduciary duties BENS, Daniel HUANG, Sterling TAN, Liang WONGSUNWAI, Wan We exploit an influential 1991 Delaware court ruling to examine the impact of changes in managerial fiduciary duties on firms’ accounting and contracting choices. The ruling expanded directors’ fiduciary duties in favor of creditors and away from shareholders for a specific group of firms. Using a hand-collected sample of debt contracts around the ruling date, we find that, following the ruling, debt contracts of affected firms rely less on the use of income escalators (provisions in loan contracts which require changes in net worth to reflect losses in full, but only partially for gains and profits) and other conservative adjustments such as requiring net worth calculations to include extraordinary losses but not gains. In addition, affected firms exhibit lower abnormal accruals, more negative special items, and are more likely to adopt SFAS 106 using the immediate recognition method for OPEB liabilities. Our results hold across a battery of robustness tests. Overall, our study demonstrates how a shift in fiduciaries duties owed by management that enhances the relative power of creditors changes the nature of both financial reporting and debt contracting. 2017-04-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1298 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2297&context=soa_research http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University accounting choice debt contracting fiduciary duties corporate governance Accounting Corporate Finance |
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We exploit an influential 1991 Delaware court ruling to examine the impact of changes in managerial fiduciary duties on firms’ accounting and contracting choices. The ruling expanded directors’ fiduciary duties in favor of creditors and away from shareholders for a specific group of firms. Using a hand-collected sample of debt contracts around the ruling date, we find that, following the ruling, debt contracts of affected firms rely less on the use of income escalators (provisions in loan contracts which require changes in net worth to reflect losses in full, but only partially for gains and profits) and other conservative adjustments such as requiring net worth calculations to include extraordinary losses but not gains. In addition, affected firms exhibit lower abnormal accruals, more negative special items, and are more likely to adopt SFAS 106 using the immediate recognition method for OPEB liabilities. Our results hold across a battery of robustness tests. Overall, our study demonstrates how a shift in fiduciaries duties owed by management that enhances the relative power of creditors changes the nature of both financial reporting and debt contracting. |
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BENS, Daniel HUANG, Sterling TAN, Liang WONGSUNWAI, Wan |
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BENS, Daniel HUANG, Sterling TAN, Liang WONGSUNWAI, Wan |
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BENS, Daniel |
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Accounting and contracting choices around a change in fiduciary duties |
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Accounting and contracting choices around a change in fiduciary duties |
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Accounting and contracting choices around a change in fiduciary duties |
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Accounting and contracting choices around a change in fiduciary duties |
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Accounting and contracting choices around a change in fiduciary duties |
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accounting and contracting choices around a change in fiduciary duties |
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Institutional Knowledge at Singapore Management University |
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2017 |
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https://ink.library.smu.edu.sg/soa_research/1298 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2297&context=soa_research |
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