The impact of fair value disclosure on bond risk premium and debt capital structure

Wang, Dongyi

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https://hdl.handle.net/2142/105002 Copy

Description

Title

The impact of fair value disclosure on bond risk premium and debt capital structure

Author(s)

Wang, Dongyi

Issue Date

2019-04-11

Director of Research (if dissertation) or Advisor (if thesis)

Abdel-Khalik, Rashad

Doctoral Committee Chair(s)

Abdel-Khalik, Rashad

Committee Member(s)

• Choi, Jaewon
• Koo, David
• Sougiannis, Theodore

Department of Study

Accountancy

Discipline

Accountancy

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Fair value accounting
• bond risk premium
• debt capital structure
• FAS157
• FAS159

Abstract

The shift towards a fair-value-oriented balance sheet receives divided opinions. The debate centers on whether fair value reporting is more relevant for financial statement users compared to historical cost. The first chapter of my dissertation investigates the relevance of fair value estimates in the context of bond pricing. Using a sample of US industrial firms, the main test compares the debt relevance, defined as the contemporaneous association between balance sheet variables and the bond risk premium, between firms having fair-value-oriented balance sheets and firms having historical-cost-based balance sheets. Results show that assets measured at fair value are more relevant for bond pricing, particularly those valued under level 2 and level 3 of the Fair Value Hierarchy. In contrast, liabilities measured at historical cost are more relevant for bond pricing. These findings are robust with respect to alternative model specification and self-selection issues. Overall, the first chapter of my dissertation documents new evidence that assets and liabilities measured at fair value are not equally relevant for bond pricing. The second chapter of my dissertation investigates the impact of fair value reporting on a firm’s debt structure. A firm’s debt structure reflects its choices about short-term versus long-term borrowing, the priority of debt claims among different lenders, and the variety of lender types. Prior literature largely ignores the heterogeneity of debt structures, treating debt as a single claim. Borrowing from theories in the finance literature, I hypothesize and test the impact of fair value reporting on three distinct features of the debt structure: maturity dispersion, debt variety, and debt prioritization. Using a series of tests, I show that firms with a higher percentage of assets and liabilities measured at fair value (fair-value firms) have more concentrated maturity profiles, fewer types of lender, and less prioritized debt, as compared to historical-cost firms. Further, these effects come from fair value assets, not fair value liabilities. Additional evidence largely supports the idea that fair value reporting impacts debt structures by reducing information asymmetry between borrowers and lenders. The second chapter of my dissertation contributes to the literature by providing new evidence on the impact of fair value reporting on firms’ debt capital structures.

Graduation Semester

2019-05

Type of Resource

text

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http://hdl.handle.net/2142/105002

Copyright and License Information

Copyright 2019 Dongyi Wang

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