GAAP Restrictions and the Debt-Contracting Value of Accounting Information

Abstract

We examine how restrictions in accounting standards affect the debt-contracting value of accounting information. We find that under more restrictive standards, lenders make more adjustments to GAAP-based performance measures by excluding certain items when designing debt covenants, suggesting that GAAP restrictions reduce the debt-contracting value of accounting information. Consistent with this, we find that restrictive standards are also positively associated with loan spreads (but significantly less so when lenders adjust GAAP numbers in loan contracts). We perform two additional analyses to enhance identification. First, we examine the relation between the exclusion of specific non-recurring items from contractual definitions of earnings and the number of restrictions in the GAAP standards that apply to each specific item. Second, in difference-in-differences analyses around standard changes, we examine whether the propensity to exclude items varies with changes in restrictions of the related standards. We find consistent evidence in both of these analyses. Overall, by focusing on lenders as important users of financial statements, this study improves our understanding of the impact of GAAP restrictions on the usefulness of accounting information.