The Empirical Study On Fair Value And Debt Contracts

On February 15th, 2006, the Ministry of Finance issued the new accounting standards, and required the listed company to implement from January 1, 2007 first. In the same time, encouraged other companies to implement the new accounting standards and all large and medium state-owned enterprises must implement the new accounting standards in the end of 2008. The implementation of new accounting standards marks Chinese accounting standards with international accounting standards convergence, it is also an important component of the development of China's market economy.In the new accounting standards, the concept of fair value is introduced appropriately and prudently, which became one of the most shining features of the new guidelines. There are 19 specific criteria related to fair value. Fair value measurement pays more emphasis on reflecting market value of assets and liabilities, the changes in fair value will be credited to the income statement or equity (capital reserve). It has an important impact on the accounting information system . Financial reporting under the new accounting standards include both the historical cost and fair value accounting information, how will this affect financial report users'decision?However, the research on fair value accounting in China mainly focus on the introduction of fair value accounting standards, assessment and relevant background theory of the normative text abroad, there are only a few empirical studies on the fair value which focus on value relevance.But as one of the main users of accounting information, how will the creditors deal with the accounting information under fair value measurement? Whether the fair value will affect the debt contracts or not? This will be the purpose of this paper. Therefore, first it introduces the background and significance of the study, review and sort out the development process of fair value in China and abroad, based on the the relative fruits home and abroad, we analyzed the links between accounting information and debt contracts, also how will fair value impact on debt contracts. On this basis, we selected the 1098 Chinese A-share listed companies in year 2007 -2008 as the research sample, the bank debt covenants as the research object, designed model to do the regression testing. Empirical results show that: the correlation between changes in fair value and long-term loans was significant positive; change in fair value included in capital reserve and short-term loans are related. This shows that the fair value had an impact on of debt contracts between enterprise and bank.However, due to the close correlation between financial assets which are measured by fair value and the stock market, stock market volatility resulted in the volatility of fair value of these assets, this make greater uncertainty for the bank forecasting the company's future earning and cash flow. Therefore we recommended that banks should take strict precautions against the credit risk which is brought by the earning volatility when they are making credit decision.