| Popis: |
We study how recognition versus disclosure affects pricing and control allocation in debt contracting. We examine whether loan spreads and the use of covenants changed around SFAS 158 adoption, which required recognition of previously disclosed pension liabilities. We find that pension underfunding is positively associated with loan spreads and negatively associated with the use of capital (i.e., balance sheet) covenants prior to the adoption of SFAS 158. This is consistent with lenders viewing disclosed accounting information as not sufficiently reliable for contracting and instead pricing the risk associated with underfunding. Post-SFAS 158, pension underfunding is associated with lower spreads and a higher likelihood of using capital covenants relative to the pre-period. Further, we find no change in the use of performance covenants or the underlying credit risk associated with pension underfunding post-SFAS 158. Collectively, this evidence is consistent with recognition improving the reliability of accounting information for debt contracting. |
