The Differential Impact of Financial Reporting Complexity on Public and Private Debt Contracting

Institutional differences between public and private debt markets can impact how complexity in accounting rules affects debt contracting. Using the adoption of ASU 2017-12 that substantially simplified the reporting of hedging activities, I compare debt contracting outcomes arising from public bond issuers' and private loan borrowers' implementations of less complex hedge accounting. I find that consistent with their commitment to high reporting quality, bond issuers lower credit spreads by 13 – 22 basis points through effective hedging induced by 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 increase for banks, increasing the agency cost of private debt; and hedging outcomes from private borrowers' ASU adoptions are insufficient towards offsetting the increased agency cost of debt. I extend the literature by documenting the heterogenous debt contracting effects of accounting rules' complexity, which has mainly been studied from the perspective of equity investors and analysts.