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Comments on “The Effects of Firm-initiated Clawback Provisions on Bank Loan Contracting?

Comments on “The Effects of Firm-initiated Clawback Provisions on Bank Loan Contracting?. Discussed by Wei-Ling Song Louisiana State University. Research Question and Empirical Strategy.

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Comments on “The Effects of Firm-initiated Clawback Provisions on Bank Loan Contracting?

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  1. Comments on “The Effects of Firm-initiated Clawback Provisions on Bank Loan Contracting? Discussed by Wei-Ling Song Louisiana State University

  2. Research Question and Empirical Strategy • Do firm-initiated clawback provisions enhance financial reporting quality, thereby reduce the information uncertainty faced by financing providers? • Use changes in the terms of bank loans to infer whether the effects can be attributed to improvement in financial reporting quality.

  3. Main Findings • The study shows that clawback-adopting firms experience • a reduction in bank loan interest rates • loan maturity is lengthened • loan collateral is less likely • the number of financial covenants is increased.

  4. Main Comments • Alternative explanation • Do clawback provisions change managers risk-taking incentives? • If clawback provisions increase mangers’ risk aversion, then they may take safer investments. • In this case, lenders will reduce interest rates, extend loan maturities, require less collateral, and firms will opt for more financial covenants because of more stable earnings.

  5. Main comments (Cont.) • The test needs to distinguish these two possible explanations. • Increasing in information reporting quality • Reducing firm operational risk • Very challenging paper • Lenders care more about short-term earnings (whether borrowers can repay within the term of loans) than long-term growth of firms • Pleasing lenders may not be value optimizing.

  6. Main comments (Cont.) • Why do firms adopt clawback in the first place? What types of firms will have the highest incentives or benefits? • The most significant determinant is firm size • Inconsistent with information quality story • Try different information environment proxies • Earning forecast errors • Information opacity measure (Kim and Verrecchia, 2001, Accounting Review)

  7. Other Comments • Analyze based on the types of loans in different regressions • Line of credit is very different from traditional term loans • Using revolver and institutional loan dummies is not enough • Loan facility mix may change • Structured finance and easy credit • Need to show loans by type, year, and clawback

  8. Other Comments (Cont.) • Show descriptive statistics by pre- and post-clawback • Risk taking • Loan terms by type • Tables 3-6 should include a dummy indicating post non-clawback firms. • Run endogenous switching model • Is peer-adoption a valid instrumental variable? • If it is a proxy for firm asset characteristic, then it may not be a valid IV.

  9. Other Comments (Cont.) • Is PostClawHigh indicating only clawback adopters or including control firms (page 24 states both)? • If both, need to separate them and compare PostClawHigh to PostNoClawHigh • Very interesting paper, strongly recommended

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