FASB Disclosure and Bank Loan Contracting: Evidence from Derivative and Hedging Footnotes

Abstract

This paper is the first to study the effect of enhanced derivative and hedging footnote disclosures on information asymmetries in bank loan contracting. Utilizing the issuance of SFAS 161, we employ a difference-in-differences design to evaluate 3,732 bank loans for 1,126 firms in the United States between 2002 and 2017. We find that borrowers whose disclosures change more after SFAS 161 enjoy lower loan spreads and fewer general covenants and have more but less stringent financial covenants. Further analyses indicate that the increased qualitative and quantitative disclosures and use of tabular display after SFAS 161 matter most for lenders in loan contracting. Our empirical results also show that the changes in contract terms are driven by the abatement of information uncertainty regarding the firm value and the improvement in firm’s disclosure quality after SFAS 161, which helps explain how enhanced DH disclosures affect information asymmetries in bank loan contracting.