Research About The Impact Of Earnings Quality On Debt Contract

The study on global banking from World Bank Organization shows that credit risk is the main risk of bank failure. As a creditor, the bank, providing funds for corporations, pays more attention to the security of money and stress credit risk management. Therefore, the bank need review a corporation’s several aspects, including financial situation, credit conditions, profitability, developing prospects, feasibility of projects, etc when making debt contracts. This task will require the support of accounting information, especially earnings information. Earnings are the main source of the funds for debt repayment, but only the data couldn’t show that there is adequate guarantee for the debt. So identifying different earnings quality is the key to correct decision and the security. Currently many domestic and international scholars generally recognize the importance of earnings quality in debt contracts. But the domestic studies still make certain conclusions on whether the banks could identify the different earnings quality of different corporations, which would like to apply loans.The paper aims to study the relationship between earnings quality and the debt contract, test whether the banks can discriminate different corporations with different earnings quality and the banks’abilities to recognize and respond to earnings quality problems. The paper adopts a method, combining normative research and empirical research. Based on the analysis of asymmetric information theory, agency conflict theory and other theories related to the utility of accounting information in debt contracts and the currently economic environment and the relevant researches, this paper determines the study period from2009to2011and then selects758A-shares manufacturing listed companies as samples, eventually getting annual data of1143samples during the period. Respectively in terms of four important aspects in the debt contract, namely new loans, debt maturity, loan types and interest rate, the paper studies the relationships between earnings quality and them, so as to evaluate the identification ability more comprehensively. According to the empirical results, the main conclusions as follows:(1) In terms of new loans, higher the corporation’s earnings quality is, the more easily it gets loans. After separating the short-term and the long-term loans, the results show that the banks prefer to provide more long-term loans for the corporations, the earnings quality of which is higher, and the relationships between earnings quality and new short-term loans are weak. However, this result of the short-term loans model isn’t stable. So the banks are more likely to grant loans to the corporations having higher earnings quality. And the long-term credit contracts pay more attention to the earnings quality than the short-term credit contracts.(2) In terms of debt maturity, the results suggest that the banks can provide longer maturity for the corporations with high earnings quality than those with low earnings quality. But this result isn’t stable.(3) In terms of loan types, the higher the earnings quality is, the greater the proportion of credit loans is. It means that the banks can grant more credit loans to the corporations with higher quality. As for low earnings quality, the banks usually set more strict requirements, for example, guarantors and certain property as collateral or pledge. In the long-term credit loans model, the earnings quality have significantly positive effect on the proportion of long-term credit loans. But the relationships between earnings quality and the proportion of short-term credit loans are not stable.(4) In terms of interest costs, the regression analysis, based on the subsamples with the highest proportion of long-term loans, suggests that the corporations with high earnings quality could get the long-term loans at the lower price. This means that the banks have abilities to adjust the interest of the long-term loans in accordance to the earnings quality. In addition, this paper else finds that ultimate controllers’attributes are also important for the debt contracts. On the one hand, the corporations, having strong relationships with government, can get more long-term loans easily. On the other hand, the banks prefer to provide credit loans for the corporations, having strong relationships with government.According to the empirical results, more persuasive evidences, this paper is able to evaluate the ability of China banks to identify the borrowers’earnings quality more comprehensively. Meanwhile there are some deficiencies. The first is that the samples only include the manufacturing listed companies. The second is that I further eliminate the data of the initial samples in the second, third and forth models. Overall this sample, to some extent, restrain the conclusions’applicability. Although the paper respectively analyzes the four aspects of debt contracts to confirm that the banks can adjust the contracts’terms and requirements according to the earnings quality. It doesn’t control and test the interaction with each other. So it’s possible for the banks to adopt relatively strict policies, on one or two aspects, so as to control risk. Maybe the banks don’t punish the companies showing low earnings quality with every aspect. After all, banks need to do business with borrowers and balance the risk and benefits.