FASB Disclosure and Bank Loan Contracting: Evidence from Derivative and Hedging Footnotes
64 Pages Posted: 8 Jul 2021
Date Written: July 3, 2021
This paper is the ﬁrst to study the effect of enhanced derivative and hedging footnote disclosures on information asymmetries in bank loan contracting. Utilizing the issuance of SFAS 161, we employ a difference-in-differences design to evaluate 3,732 bank loans for 1,126 ﬁrms in the United States between 2002 and 2017. We ﬁnd that borrowers whose disclosures change more after SFAS 161 enjoy lower loan spreads and fewer general covenants and have more but less stringent ﬁnancial covenants. Further analyses indicate that the increased qualitative and quantitative disclosures and use of tabular display after SFAS 161 matter most for lenders in loan contracting. Our empirical results also show that the changes in contract terms are driven by the abatement of information uncertainty regarding the ﬁrm value and the improvement in ﬁrm’s disclosure quality after SFAS 161, which helps explain how enhanced DH disclosures affect information asymmetries in bank loan contracting.
Keywords: information asymmetry, bank loan, disclosure, derivatives, hedging, SFAS 161
JEL Classification: G21, G32, M41, M48
Suggested Citation: Suggested Citation