Covenant violation concern and investors’ pricing of Level 3 fair value adjustments

IF 2.9 3区 管理学 Q2 BUSINESS, FINANCE
Laura Mehnaz , Asheq Rahman , Humayun Kabir
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引用次数: 0

Abstract

We examine the influence of concerns relating to violation of the borrowing covenant on the investors’ valuation of Level 3 fair value adjustments. We reason that managerial bias in Level 3 fair value estimation is greater for firms approaching violation of the borrowing covenant. Based on a sample of Australian real estate firms, we find that managers report upward adjustments to Level 3 investment property values when they approach the threshold where the borrowing covenant is violated; and further find that this deliberate use of discretion is significant for firms closer to the interest coverage thresholds, but not for those approaching the gearing thresholds. We then find that, while fair value adjustments are priced positively, investors apply incremental discounts for firms closer to the violation threshold, or firms which are in technical default of borrowing covenants relative to those that are far from violation. Additionally, we show that the pricing discount on fair value adjustments attributable to the concern over covenant violation is significant only for the weaker governance sub-sample, indicating that effective monitoring mitigates faithful representation concerns about Level 3 fair value estimations.

契约违约担忧与投资者对三级公允价值调整的定价
我们研究了与违反借款契约有关的担忧对投资者对第3级公允价值调整的估值的影响。我们推断,对于即将违反借款契约的公司,第三层公允价值估计中的管理偏差更大。基于澳大利亚房地产公司的样本,我们发现,当经理接近违反借款契约的门槛时,他们报告向上调整3级投资房地产价值;并进一步发现,这种故意使用自由裁量权是显著的公司更接近利息覆盖阈值,但不是那些接近杠杆率阈值。然后我们发现,虽然公允价值调整定价为正,但投资者对更接近违规阈值的公司或相对于那些远离违规的公司处于借款契约技术违约的公司应用增量折扣。此外,我们表明,由于担心契约违反而导致的公允价值调整的定价折扣仅在较弱的治理子样本中显著,这表明有效的监测减轻了对三级公允价值估计的忠实代表的担忧。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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来源期刊
CiteScore
6.00
自引率
3.00%
发文量
24
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