Evidence on the determinants and economic consequences of delegated monitoring

• Published in: Journal of accounting & economics Vol. 53; no. 3; pp. 555 - 576
• Main Authors: Beatty, Anne, Liao, Scott, Weber, Joseph
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-06-2012; Elsevier Sequoia S.A
• Subjects: Accounting quality; Contracting; Contracts; Covenants; Credit; Cross-acceleration; Debt; Debt repayment; Default; Deficit financing; Delegation; Determinants; Financial reporting; Monitoring; Provisions; Public debt; Studies; Debt; G30; M40; Contracting; Monitoring; Accounting quality; Covenants
• ISSN: 0165-4101; 1879-1980
• DOI: 10.1016/j.jacceco.2011.12.002

We investigate delegated monitoring by examining the determinants and effects of including cross-acceleration provisions in public debt contracts. We find that cross-acceleration provision use depends on borrowers' going concern relative to liquidation values, debt repayment structures, credit quality, and financial reporting quality. This suggests that the use of cross-acceleration provisions increases when the costs of cascading defaults are lower, the conflicts between creditor classes are higher, and the benefits of delegating monitoring to banks are higher. We also find a lower interest rate on public debt contracts with cross-acceleration provisions, but the rate reduction depends on borrowers' financial reporting quality.
► This paper examines the decision to use cross-acceleration provisions in public debt. ► We examine the determinants of the use of cross-acceleration provisions. ► We also examine the effect of these provisions on other contract terms.