Accounting research seminar by Professor Mark Clatworthy

Professor Clatworthy's research interests are in financial reporting, including the links between accounting information and capital markets and audit markets. He is joint editor of Accounting and Business Research and Former President of the European Accounting Association. He has published in several leading journals, including the Accounting Review, Journal of Accounting and Economics, British Accounting Review and Journal of Business Finance and Accounting.

We re-examine how debt contracting design is affected by fair value accounting through modification of covenant definitions in private debt contracts. Prior research reports that a small but significant proportion of lenders remove the effects of fair value accounting by modifying covenant definitions. We study the incidence and antecedents of these fair value opt-outs in private lending agreements after the introduction of SFAS 159 over an extended time period. We find that 30%-40% of private debt contracts contain a fair value opt-out clause – more than twice as high as previous estimates. Our results also demonstrate the time taken before important changes to accounting standards are fully impounded into contracting practices. In cross sectional analyses, we reinforce some (but not all) findings of the determinants of fair value opt-outs.