The Differential Impact of Financial Reporting Complexity on Public and Private Debt Contracting: Evidence from ASU 2017-12

Using ASU 2017-12, which substantially simplified reporting of hedging activities, I compare debt contracting outcomes from public bond issuers’ and private loan borrowers’ implementations of less complex hedge accounting. Bond issuers lower credit spreads by 13 – 22 basis points through effective hedging and reporting under the ASU. In contrast, private loan borrowers face 11 basis points higher loan pricing, and 50% greater balance-sheet covenants post-ASU adoption. I argue that when the ASU removes risk-relevant reporting requirements, information frictions and thus the agency cost of private debt increase for banks, and hedging outcomes from private borrowers’ ASU adoptions are insufficient towards offsetting the increased agency cost of debt. Bondholders and private lenders price the informational content of simplified hedge accounting rules differently even when borrowers’ real hedging outcomes remain unchanged. I extend the literature by showing that complex accounting rules have opposite effects on institutionally different public and private debt markets.