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The effect of timely loss recognition and accrual quality on corporate bond spread: The influence of legal and financial institutions

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  • Aly Zaher, Noha
  • Mohamed, Ehab K.A.
  • Basuony, Mohamed A.K.

Abstract

We use a unique dataset of 11,497 corporate bonds issued by firms operating in 56 countries. The objective of the paper is to study the effect of timely loss recognition and accrual discretion on the design of public debt contracts in international bond markets, especially that previous research had more focus on bank loans rather than bonds. The paper provides an alternative explanation to prior literature for the relevance of timely loss recognition to the bond market, and clarifies more the role of accrual quality in debt contracting. We utilize our international sample to capture variations in the main analysis with respect to the legal enforcement in which the issuer firm operates, or the financial development of the market of issue. We find evidence that timely loss recognition is counterproductive with bond issuances, whereas accrual quality has a strong favorable impact on bond spread. The relevance of accounting choices to bond markets changes with the level of a country’s law enforcement and a market’s financial development. The paper encourages researchers to come up with different explanations for the influence of accounting choice on different types of debt contracts. It also highlights the role played by institutions to mitigate the effects.

Suggested Citation

  • Aly Zaher, Noha & Mohamed, Ehab K.A. & Basuony, Mohamed A.K., 2020. "The effect of timely loss recognition and accrual quality on corporate bond spread: The influence of legal and financial institutions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:intfin:v:64:y:2020:i:c:s1042443119301544
    DOI: 10.1016/j.intfin.2019.101171
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    Cited by:

    1. Le, Ha Thi Thu & Vo, Xuan Vinh & Vo, Thi Thuc, 2021. "Accruals quality and the cost of debt: Evidence from Vietnam," International Review of Financial Analysis, Elsevier, vol. 76(C).
    2. Loureiro, Gilberto & Silva, Sónia, 2021. "The impact of securities regulation on the information environment around stock-financed acquisitions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    3. Ater, Brandon & Hansen, Bowe, 2021. "Do the specific countries in which a multinational corporation operates affect its private loan contracts?," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    4. Le, Ha Thi Thu & Tran, Ha Giang & Vo, Xuan Vinh, 2021. "Audit quality, accruals quality and the cost of equity in an emerging market: Evidence from Vietnam," International Review of Financial Analysis, Elsevier, vol. 77(C).

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