“Creditor Rights and Accounting Quality: Evidence from a Natural Experiment” – by Mr. Siddharth M. Bhambhwani
Mr. Siddharth M. Bhambhwani
PhD Candidate in Accounting
University of Miami
I investigate whether increases in creditor rights affect the borrowers’ accounting quality. I hypothesize that creditors monitor the borrowers’ financial statements to a greater extent when they have stronger enforcement rights, which induces increases in borrowers’ accounting quality. Exploiting a landmark reform that increased secured creditor enforcement rights, I document that borrowers with higher levels of secured debt increased accounting quality following passage of the reform. The effect of creditor rights on borrowers’ accounting quality is stronger when creditors have greater negotiating power and when borrowers have higher credit risk. The results are consistent with 1) lenders incseasing their reliance on financial statements under an arm’s length contracting regime and 2) accounting information serving as an instrument in enforcing debt contracts.