Essays on borrowing, monitoring, and the cost of debt

Sangshin Pae, Purdue University

Abstract

The two essays in this dissertation study issues related to debt contracting. The first essay examines whether aspects of debt contracting have been affected by the provisions of the Sarbanes-Oxley Act of 2002 that increased monitoring of management’s activities by independent directors, auditors and regulators. Using a sample of 4,610 new private debt contracts, I document a significant decrease in the cost of debt after the implementation of Sarbanes-Oxley, after controlling for other influencing factors. I also show that small firms and growth firms experienced a relatively greater reduction in the cost of debt with the increase in monitoring, consistent with greater levels of information asymmetry or uncertainty associated with these firms and thus with Sarbanes-Oxley having a greater impact on them. Overall, the findings in this study suggest that increased monitoring induced by Sarbanes-Oxley had a significant impact on contracts in the private debt market. The second essay examines the relationship between borrower’s choice of debt financing (public versus private) and its choice of earnings management tools (accrual-based versus real activities). Based on a sample of public and private debt issuers from 1992 through 2002, I document that public debt issuers increase their accruals prior to issue then decrease their accruals subsequent to issue year while private issuers do not show specific pattern. In addition, I find evidence that both public and private debt issuers engage in real earnings management. However, the results suggest that private debt issuers manipulate earnings via real actions more heavily than public debt issuers. Overall, the findings in this study suggest that public debt issuers prefer to manipulate earnings through income increasing accruals while private debt issuers prefer to manage earnings through real activities.

Degree

Ph.D.

Advisors

Watts, Purdue University.

Subject Area

Accounting

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