DOI: 10,1111 / jbfa.

12295

Masuk pembalikan dalam hubungan antara perataan laba

dan biaya utang
Dan Amiram1,2 Edward Owens3
1Columbia University Graduate School of Business, New York, NY 10027, Amerika Serikat
2Coller School of Management, Universitas Tel Aviv , Tel Aviv 6997801, Israel
3Goizueta Business School, Emory University, Atlanta, GA 30322, Amerika Serikat
Correspondence Edward Owens, Goizueta Business School, Emory University, Atlanta, GA 30322, Amerika Serikat. Email:
ed.owens@emory.edu
Abstrak Terlepas dari kenyataan bahwa pendapatan smoothing oleh manajer adalah fenomena sive perva- yang telah banyak
diteliti, masih ada literatur yang memberikan bukti lengkap tentang bagaimana smoothing dikaitkan dengan biaya utang pada
umumnya, dan di pasar kredit swasta di TERTENTU par-. Faktor-faktor institusional terkait dengan saluran con pinjaman
pribadi, dikombinasikan dengan motivasi teoritis untuk menghaluskan, membuatnya jelas apakah smoothing akan positif, negatif,
atau tidak terkait dengan penyebaran pinjaman. Menggunakan kedua lintas negara dan dalam negeri analisis pada sampel
internasional pinjaman pribadi, kami memprediksi dan memberikan bukti bahwa perataan laba associ- diciptakan dengan biaya
yang lebih rendah dari utang ketika ancaman manfaat pribadi con- sangkaan oleh manajer rendah, namun dikaitkan dengan biaya
yang lebih tinggi dari utang ketika ancaman konsumsi manfaat pribadi oleh manajer tinggi. Kami menyediakan bukti pertama
dalam literatur bahwa efek memutarbalikkan dari smoothing diduga dapat mendominasi pandangan sinyal smoothing dalam
desain kontrak utang, dan kami mengidentifikasi ancaman konsumsi manfaat swasta sebagai fitur dari lingkungan kontraktor yang
secara empiris mengungkapkan pembalikan tanda dalam hubungan antara smoothing dan biaya utang.
KATA KUNCI kontrak utang, perataan laba, manfaat pribadi

1 PENDAHULUAN
Terlepas dari kenyataan bahwa pendapatan smoothing oleh manajer adalah fenomena meresap yang telah banyak diteliti, literatur
yang ada memberikan bukti lengkap mengenai bagaimana peminjam pendapatan smoothing dikaitkan dengan biaya utang pada
umumnya, dan di pasar kredit swasta pada khususnya. Faktor-faktor kelembagaan yang berhubungan dengan kontrak pinjaman
pribadi, dikombinasikan dengan motivasi teoritis untuk menghaluskan, membuatnya jelas ex ante apakah smoothing akan positif,
negatif, atau tidak terkait dengan penyebaran pinjaman. Sejauh ini, literatur yang ada telah diperiksa pengaturan di mana hanya
efek sinyal dari smoothing mendominasi, dan karena itu menyimpulkan bahwa smoothing dikaitkan dengan biaya yang lebih
rendah dari utang. Dalam studi ini, kami memperluas literatur. Secara khusus, kita mengambil keuntungan dari pengaturan
internasional untuk memprediksi dan mengidentifikasi fitur termotivasi secara teoritis dari lingkungan kontraktor yang
mengungkapkan pembalikan tanda dalam hubungan
40 c 2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa J Bus Fin Acc. 2018; 45: 40-71.
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antara smoothing dan biaya utang, sehingga memberikan bukti pertama dalam literatur bahwa efek memutarbalikkan smoothing
diduga dapat mendominasi efek signaling smoothing dalam desain kontrak utang.
Perataan laba adalah latihan kebijaksanaan manajerial untuk mengubah profil waktu pendapatan untuk mengurangi
kemampuan variabel- dari aliran pendapatan dilaporkan perusahaan (misalnya, Beidleman, 1973; Fudenberg & Tirole, 1995;
Trueman & Titman, 1988) 0,1 Literatur berfokus pada dua motivasi alternatif utama untuk perataan laba. Di satu sisi, manajer
mungkin halus laba dalam upaya untuk jujur menyampaikan informasi pribadi mereka tentang pendapatan ekonomi yang
mendasari dan risiko yang terkait dengan penyedia modal dan pelaku pasar lainnya (yaitu, informasi sinyal pandangan
smoothing) (misalnya, Trueman & Titman, 1988) . Atau, manajer mungkin halus laba (terlepas dari informasi pribadi mereka
tentang pendapatan ekonomi jangka lebih panjang) dalam upaya untuk menghindari intervensi oleh pihak luar untuk
memfasilitasi konsumsi manfaat pribadi dari perusahaan (yaitu, informasi garbling pandangan smoothing) (misalnya, Fudenberg
& Tirole, 1995) .2,3
informasi sinyal dan informasi garbling dilihat dari smoothing hasil terarah menentang prediksi con- cerning hubungan antara
smoothing diamati dan biaya utang. Pandangan sinyal menunjukkan bahwa smoothing merupakan upaya manajer untuk sinyal
bahwa pendapatan ekonomi yang lebih stabil daripada yang disimpulkan dari unsmoothed laba (dilaporkan), dan karena itu
smoothing menunjukkan probabilitas yang lebih rendah dari default (misalnya, Merton, 1974). Sebaliknya, pandangan
memutarbalikkan menunjukkan bahwa smoothing dikaitkan dengan risiko yang lebih tinggi dari konsumsi manfaat pribadi.
Sejauh bahwa konsumsi manfaat pribadi ekstrak kekayaan perusahaan dengan mengorbankan debtholders (Lin, Ma, Malatesta, &
Xuan, 2011), informasi garbling pandangan smoothing akan menyarankan loss given default yang lebih tinggi dan probabilitas
yang lebih tinggi dari default (Fudenberg & Tirole, 1995). Dalam konteks rute alternatif pandangan smoothing, ceteris paribus,
kami memperkirakan biaya utang akan lebih rendah jika pemberi pinjaman mengambil sinyal informasi pandangan smoothing,
dan akan lebih tinggi jika pemberi pinjaman mengambil informasi garbling pandangan smoothing, ceteris paribus. Selain itu,
sebagai pemberi pinjaman hanya kehilangan uang jika peminjam sebenarnya default, kami berharap efek smoothing biaya utang
menjadi kuat ketika probabilitas default adalah lebih tinggi.
Literatur yang ada memberikan bukti dicampur pada hubungan antara smoothing dan biaya modal di pasar ekuitas. Bukti ini
tidak diterjemahkan ke dalam pasar utang karena kreditur memiliki fungsi hasil yang berbeda dibandingkan equityholders, dan
dapat melindungi diri mereka sendiri melalui mekanisme kontrak lainnya (misalnya, pembatasan keuangan). Ada bukti dari
penelitian tentang efek smoothing di pasar utang memberikan bukti bahwa baik smoothing adalah diasosiasikan asso- dengan
biaya yang lebih rendah dari utang, atau bahwa tidak ada hubungan. Artinya, literatur yang ada tidak mendokumentasikan setiap
pengaturan atau kondisi di mana smoothing dikaitkan dengan biaya yang lebih tinggi dari utang, yang dicatat diberi kuat literatur
ical theoret- yang menunjukkan bahwa smoothing dapat, dalam beberapa situasi, mewakili garbling oleh manajemen, yang bisa
negatif mempengaruhi pemberi pinjaman.
Dugaan kami adalah bahwa literatur yang ada belum meneliti hubungan antara smoothing dan biaya utang dalam pengaturan
atau cara di mana efek garbling dapat mengungkapkan itu sendiri. Bukti dari pasar obligasi AS smoothing yang berhubungan
dengan biaya yang lebih rendah dari utang tidak digeneralisasikan ke pasar kredit yang lebih luas, karena pasar obligasi dihuni
oleh kualitas relatif tinggi, peminjam transparan. Dengan demikian, pandangan memutarbalikkan perataan tampaknya relatif tidak
mungkin untuk mewujudkan (Bharath, Sunder, & Sunder, 2008).
Studi yang meneliti smoothing di pasar kredit swasta menemukan baik negatif atau tidak ada hubungan antara smoothing dan
biaya utang, baik karena mereka tidak fokus pada subset dari peminjam di mana efek garbling yang paling mungkin untuk
mendominasi, atau karena pemberi pinjaman dapat memperoleh informasi pribadi dari peminjam, yang dapat mengurangi
asosiasi
1 keseluruhan volatilitas laba perusahaan relatif terhadap arus kas (yaitu, 'kelancaran pendapatan') ditentukan oleh dua komponen.
Komponen pertama, yang kita sebut sebagai 'kelancaran mendasar', ditentukan oleh volatilitas yang melekat pada proses bisnis
yang mendasari yang menghasilkan laba (yang bukan merupakan fungsi dari kebijaksanaan pelaporan manajerial). Komponen
kedua, yang kita sebut sebagai 'perataan laba' atau hanya 'smoothing', adalah bagian dari kelancaran pendapatan keseluruhan yang
ditentukan oleh pilihan manajerial pelaporan (yaitu, kebijaksanaan manajerial), yang sendiri dipengaruhi oleh insentif manajerial.
2 Kami menggunakan istilah 'manfaat pribadi' sebagai istilah umum yang mencakup beberapa konsep, termasuk kedua manfaat
pribadi nilai-ekstraktif dan non-nilai-manfaat pribadi ekstraktif, yang keduanya timbul dari kemampuan manajer untuk
mengendalikan perusahaan. Aghion dan Bolton (1992) menyebut kategori ini sebagai 'berupa uang' dan 'non-uang', atau 'moneter'
dan 'non-moneter' manfaat pribadi, masing-masing. Untuk lebih tepat, kita memilih istilah nilai-ekstraktif dan
non-nilai-ekstraktif, karena, misalnya, bisa ada manfaat pribadi non-moneter yang tetap adalah nilai ekstraktif (misalnya,
kelalaian). Manfaat pribadi nilai-ekstraktif timbul dari tindakan seperti bangunan kerajaan, ekstraksi sewa, konsumsi merembes
dan pengambilalihan (Tirole, 2001), yang mengurangi nilai perusahaan kepada pemegang saham minoritas dan pemegang utang.
Sebaliknya, manfaat swasta non-nilai-ekstraktif termasuk hubungan sosial dan profesional, status dan ikatan opportuni- yang
muncul dari terus mengendalikan dan menjalankan entitas (Aghion & Bolton, 1992).
3
Kami mencatat bahwa dalam konteks ini, istilah 'sinyal' dan 'memutarbalikkan' mengacu pada niat manajer yang membuat
pilihan smoothing. Literatur yang ada kadang-kadang mengacu pada ini sebagai 'informatif' dan motivasi 'oportunistik' untuk
menghaluskan, masing-masing (misalnya, Dechow, Ge, & Schrand, 2010).
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antara istilah smoothing dan kontrak. Kami melihat kemungkinan kedua sebagai tidak mungkin, karena jika manajer memang
halus untuk memfasilitasi konsumsi manfaat pribadi, tidak mungkin mereka akan mengungkapkan motivasi mereka untuk
pemberi pinjaman di nications tual pribadi. Di sisi lain, jika manajer halus untuk sinyal, itu memang masuk akal bahwa manajer
juga dapat memberikan informasi pribadi kepada pemberi pinjaman yang memperkuat sinyal ini. Yang penting, kita tidak
menyatakan bahwa pemberi pinjaman swasta adalah satu-satunya (atau, bahkan, primer) penonton untuk smoothing.4 berbasis
sinyal demikian, manajer akan masih perlu untuk kelancaran pendapatan untuk sinyal informasi pribadi mereka kepada peserta
pasar lainnya dengan siapa tidak ada pribadi saluran komunikasi yang ada (misalnya, equityholders, pemegang obligasi) 0,5
dugaan kami adalah bahwa pandangan pemberi pinjaman dari smoothing dibentuk oleh penilaian mereka tentang
kemungkinan bahwa manajer akan mengkonsumsi manfaat pribadi, yang merupakan fungsi dari tingkat penegakan dan hukuman
yang dikenakan di diberikan ronment gus jika manajer tertangkap mengkonsumsi manfaat pribadi. Akhirat, kita lihat lingkungan
dengan lemah penegakan (kuat) dan lemah (kuat) konsekuensi hukuman untuk konsumsi manfaat swasta sebagai berpose 'tinggi
(rendah) ancaman' konsumsi manfaat pribadi. Dalam arti probabilistik, kami menduga bahwa di tinggi lingkungan (rendah)
ancaman, pemberi pinjaman lebih mungkin untuk mengambil informasi garbling (sinyal) pandangan smoothing.6 Secara intuitif,
jika ada sanksi yang keras untuk mengkonsumsi manfaat pribadi, pemberi pinjaman akan menilai lebih rendah kemungkinan
bahwa manajer sedang berusaha untuk mengkonsumsi manfaat pribadi, ceteris paribus, dan pandangan mereka tentang smoothing
akan berbentuk accordingly.7 intuisi ini memberikan dasar untuk desain empiris kita, di mana kekhawatiran pilihan desain kunci
kami bagaimana secara empiris mengukur ancaman konsumsi manfaat pribadi di lingkungan kontraktor.
Langkah-langkah pemerintahan tingkat perusahaan menyediakan satu opsi tersebut untuk mengukur ancaman konsumsi
manfaat pribadi. Namun, karena manajer memilih kedua tingkat smoothing dan mekanisme tata kelola perusahaan-tingkat, ada
kekhawatiran endogeneity standar dengan menggunakan tindakan tegas tingkat. Dengan demikian, untuk utama kami analisis
kami menggunakan sampel nasional antar, yang memungkinkan kita untuk mengeksploitasi masuk akal eksogen (dari perspektif
manajer) variasi tingkat negara dalam ancaman konsumsi manfaat swasta di lingkungan kontraktor.
Konsisten dengan prediksi kami, kami memberikan bukti smoothing yang berhubungan dengan biaya yang lebih rendah dari
utang di negara-negara yang ditandai dengan ancaman rendah konsumsi manfaat pribadi, dan terkait dengan biaya yang lebih
tinggi dari utang di negara-negara yang ditandai dengan ancaman tinggi dari konsumsi manfaat pribadi. Selanjutnya, kita
menemukan bahwa efek smoothing biaya utang secara khusus diucapkan untuk perusahaan dengan risiko kredit yang relatif
tinggi, konsisten dengan intuisi bahwa pemberi pinjaman akan sangat prihatin dengan implikasi merapikan kerugian kredit
diharapkan dalam kasus di mana itu lebih mungkin bahwa peminjam akan default.
Kami mencatat bahwa tidak mungkin bahwa pemberi pinjaman melihat smoothing sebagai sinyal informasi
(memutarbalikkan) untuk semua perusahaan dalam lingkungan ancaman rendah (tinggi). Artinya, dalam salah lingkungan
ancaman rendah atau tinggi, ancaman spesifik perusahaan konsumsi manfaat pribadi mungkin mempengaruhi hubungan antara
smoothing dan biaya utang. Meskipun mengejar analisis berdasarkan karakteristik pemerintahan tingkat perusahaan secara alami
menimbulkan kekhawatiran endogeneity, kita ulangi pengujian kami menggunakan langkah-Measures variasi tingkat perusahaan
dalam ancaman konsumsi manfaat pribadi dalam suatu negara. Secara khusus, kami menggunakan persentase dipegang saham
(misalnya, Iliev, Lins, Miller, & Roth, 2015) untuk sampel non-AS utama kami, dan ulangi analisis kami menggunakan indeks
kubu manajerial spesifik perusahaan (Bebchuk, Cohen, & Ferrell 2009) dengan US-satunya sampel yang lebih besar. Konsisten
dengan temuan utama kami, dalam kedua kasus smoothing negatif (positif) terkait dengan biaya utang untuk perusahaan dengan
relatif rendah ancaman (tinggi) dari konsumsi manfaat pribadi.
Meskipun analisis kami fokus pada hubungan antara smoothing dan biaya utang, kreditur swasta memiliki pinjaman con- hal
membagi-bagikan brosur selain suku bunga yang mereka miliki yang mungkin juga dipengaruhi oleh perataan laba, seperti
4
Sebagai contoh, Dou, Hope, dan Thomas (2013) memberikan bukti bahwa hubungan perusahaan-pemasok dapat memberikan
smoothing insentif.
5 Memang, logika dasar dari penelitian kami memegang bahkan jika pemberi pinjaman bisa langsung mendapatkan semua
informasi dari peminjam selain apakah peminjam adalah manfaat pribadi con Suming atau tidak.
6 Konsisten dengan dugaan kami, dalam wawancara informal dengan petugas pinjaman bank di negara-negara di mana lebih
mudah untuk mengkonsumsi manfaat pribadi, petugas pinjaman memang menunjukkan bahwa mereka menjadi 'gugup' tentang
peminjam jika laporan keuangannya tampak terlalu 'stabil.' Sebaliknya, petugas pinjaman diyakinkan ketika mereka mengamati
laba mulus di negara-negara di mana lebih sulit untuk mengkonsumsi manfaat pribadi. Setelah mengatakan ini, prediksi kami
juga mengikuti jika pemberi pinjaman menyimpulkan pandangan mereka smoothing dari sumber informasi lainnya (yaitu, tidak
bergantung pada karakteristik lingkungan), selama peminjam motivasi smoothing berkorelasi dengan manfaat ancaman konsumsi
swasta.
7 Kami meresmikan intuisi ini dalam Lampiran B.
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pembatasan keuangan, persyaratan agunan dan jatuh tempo pinjaman. Oleh karena itu, semua analisis kita kontrol untuk berbagai
variabel addi pinjaman tingkat tional. Selanjutnya, hasil menunjukkan bahwa implikasi dari smoothing diamati dimasukkan ke
dalam pinjaman terutama melalui penyebaran pinjaman, meskipun ada beberapa bukti bahwa smoothing berhubungan dengan
peningkatan penggunaan perlindungan perjanjian keuangan di lingkungan ancaman tinggi.
Literatur yang ada mendokumentasikan korelasi antara karakteristik sistem akuntansi yang berbeda, termasuk smoothing,
akrual kualitas, konservatisme dan persistensi laba (misalnya, Dechow et al., 2010). Namun, ada perbedaan kunci dalam
konstruksi yang mendasari ditangkap oleh menghaluskan dan atribut-atribut akuntansi lainnya. Kami menemukan bahwa baik
accru- als kualitas, konservatisme, atau persistensi laba perubahan tanda dalam hubungan mereka dengan spread kredit di
ronments ancaman gus (konsisten dengan harapan kami), dan kesimpulan kami mengenai smoothing ditahan setelah termasuk
kontrol untuk efek potensial dari kualitas akuntansi, konservatisme dan persistensi laba.
Kontribusi utama dari penelitian ini adalah untuk memberikan bukti baru bahwa efek garbling dari smoothing dapat dom-
desain kontrak utang inate, di mana tanda hubungan antara biaya utang dan pendapatan pribadi smoothing tergantung (diduga)
pada ancaman manfaat pribadi manajerial konsumsi di lingkungan kontraktor. Studi kami langsung alamat panggilan untuk
penelitian tambahan pada hubungan antara smoothing dan biaya utang (Lang & Maffett, 2011a), dan memberikan kontribusi bukti
baru untuk literatur internasional yang meneliti penyebab dan Konsekuensi perataan laba di pasar modal (misalnya , Black,
Penjual, & Manly, 1998; Lang, Lins, & Maffett, 2012; Leuz, Nanda, & Wysocki, 2003; Shuto & Iwasaki, 2014).

2 LATAR BELAKANG DAN MOTIVASI

kontrak utang swasta merupakan sumber penting modal bagi kebanyakan perusahaan (Ivashina, 2009; Sufi, 2007; Thomson
Reuters, 2014). Terlepas dari kenyataan bahwa sastra dalam meneliti perataan laba, ada bukti yang tidak lengkap pada asosiasi
dengan biaya utang swasta. Literatur yang ada berfokus pada dua pandangan perataan laba - informasi tampilan sinyal dan
informasi garbling view.8 Informasi sinyal pandangan menunjukkan bahwa perataan laba adalah mekanisme yang efisien bagi
manajer untuk menyampaikan informasi pribadi mereka tentang laba masa depan (misalnya, Barnea, Ronen , & Sadan, 1975;
Beidleman, 1973; Demski, 1998; Ronen & Sadan, 1981). Konsisten dengan pandangan tion signaling INFORMATION, Graham,
Harvey, & Rajgopal (2005) memberikan bukti survei berbasis di AS bahwa manajer halus pri marily untuk menyampaikan
prospek pertumbuhan di masa depan dan persepsi risiko investor yang lebih rendah. Selanjutnya konsisten dengan pandangan ini,
Hunt, Moyer, & Shevlin (2000) memberikan bukti di AS menetapkan bahwa perataan laba meningkatkan tionship eratnya
kontemporer antara harga saham dan laba. Demikian juga, menggunakan sampel AS, Tucker & Zarowin (2006) menemukan
bahwa perubahan harga saham saat ini perusahaan dengan pendapatan yang lebih smoothing berisi informasi tentang laba masa
depan daripada perubahan harga saham saat ini perusahaan dengan smoothing lebih rendah.
Sebaliknya, informasi garbling pandangan menunjukkan bahwa manajer halus pendapatan untuk menyembunyikan tindakan
mereka dan menghindari intervensi oleh pihak luar untuk memfasilitasi konsumsi manfaat pribadi (Acharya & Lambrecht 2015;
Fudenberg & Tirole, 1995). Menurut teori yang masih ada, smoothing dapat mengurangi intervensi dari luar oleh monitor karena
sinyal yang lebih baru dari kinerja yang lebih informatif daripada sinyal kurang baru; Oleh karena itu, sebuah laba hasil buruk
menyebabkan konsekuensi negatif bagi manajer bahkan jika perusahaan memiliki 'offsetting' hasil laba yang baik dalam periode
sebelumnya, sementara hasil rata-rata mengarah ke konsekuensi negatif yang lebih sedikit (Fudenberg & Tirole, 1995). Artinya,
di sebuah perusahaan di mana pendapatan unsmoothed yang tidak stabil, manajer harus insentif untuk kelancaran pendapatan
hanya untuk mengurangi volatilitas (tanpa memperhatikan keyakinan mereka tentang pendapatan ekonomi jangka panjang),
karena hal itu mengurangi kemungkinan bahwa mereka akan ditangkap mengkonsumsi manfaat pribadi (jika mereka telah
memilih untuk melakukannya) (DeFond & Park, 1997). DeFond & Park (1997), Fudenberg & Tirole (1995), Lang & Maffett
(2011b) dan Leuz et al. (2003) menemukan bukti empiris smoothing yang tampaknya dimotivasi oleh kekhawatiran manajemen
tentang keamanan kerja, sesuai dengan teori di Fudenberg & Tirole (1995). Bukti internasional disajikan di Leuz et al. (2003)
menunjukkan bahwa perataan laba akan lebih parah
8
Kami menyadari bahwa motivasi untuk smoothing ada selain dari isyarat atau garbling, seperti minimalisasi pajak.
Pertimbangan smoothing seperti vations moti- lainnya tidak mempengaruhi logika kunci dari penelitian kami, seperti yang
dibahas dalam Bagian 6.5.
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negara di mana lembaga-lembaga tingkat negara melakukan pekerjaan yang relatif miskin dalam membatasi konsumsi dalam
manfaat pribadi, yang juga konsisten dengan pandangan memutarbalikkan dari smoothing. Relatedly, Gopalan & Jayaraman
(2012) memberikan bukti bahwa perusahaan dengan kontrol lebih insider pameran perataan laba yang relatif lebih dari
non-insider dikendalikan perusahaan di negara-negara dengan perlindungan investor miskin.
Studi yang meneliti efek smoothing di pasar utang beberapa. Li & Richie (2016) menguji apakah ing polos mempengaruhi
biaya utang publik di pasar obligasi AS. Studi yang memprediksi dan mendokumentasikan hubungan negatif antara smoothing
dan yield obligasi, dan sesuai menyimpulkan bahwa informasi sinyal pandangan smoothing keabu domi- di pasar kredit publik. Li
& Richie (2016) lebih lanjut mempertimbangkan efek dari karakteristik pemerintahan, dan tidak memberikan bukti bahwa
hubungan negatif antara smoothing dan biaya utang secara statistik ferent dif- signifikan antara perusahaan dengan baik-diatur
dan buruk-diatur. Selanjutnya, hasil mereka menunjukkan bahwa pasar kredit publik AS, efek memutarbalikkan dari smoothing
tidak cukup kuat untuk mendominasi desain kontrak utang (yaitu, hubungan antara smoothing dan biaya utang publik tidak
pernah positif), bahkan dalam perusahaan buruk-diatur. Menggunakan sampel dari pinjaman Jepang, Takasu (2013)
mendokumentasikan hubungan negatif (tidak ada hubungan) antara smoothing dan biaya utang ketika pemberi pinjaman memiliki
rendah derajat (tinggi) dari produksi informasi tentang peminjam.
Demerjian, Donovan, & Lewis-Barat (2017) menguji apakah smoothing mempengaruhi frekuensi lation perjanjian
pelanggaran- pelanggaran dalam kontrak pinjaman swasta AS. Meskipun kertas yang berfokus pada perjanjian, kertas juga
menyajikan analisis sekunder yang menunjukkan bahwa smoothing berhubungan negatif dengan spread pinjaman di AS, lagi
konsisten dengan informasi sinyal pandangan smoothing di lingkungan dengan ancaman rendah konsumsi manfaat pribadi.
Relat-, menduduki, Gassen & Fulbier (2015) memberikan bukti bahwa hubungan negatif antara smoothing dan biaya utang lebih
kuat di lingkungan dengan efisiensi kontraktor miskin, konsisten dengan keinginan pemberi pinjaman untuk menghindari
pelanggaran perjanjian di mana renegosiasi kontrak lebih sulit. Seperti Li & Richie (2016), Gassen & Fulbier (2015) tidak
menemukan bukti bahwa pernah ada hubungan positif antara smoothing dan biaya utang, bahkan di lingkungan dengan miskin
perusahaan governance.9
Untuk meringkas, bukti yang masih ada meninggalkan pembaca sastra dengan kesimpulan tegas smoothing yang negatif
terkait dengan biaya utang. Namun, studi pasar kredit yang masih ada ini memeriksa pengaturan (yaitu, obligasi kets Mar- dan /
atau sampel AS) di mana informasi motivasi garbling relatif tidak mungkin untuk mengungkapkan itu sendiri. Dengan demikian,
tidak jelas apakah studi yang masih ada gagal untuk menemukan bukti di pasar kredit konsisten dengan informasi garbling
pandangan smoothing karena tidak ada, atau karena pengaturan yang dipilih tidak memadai untuk mendeteksi itu. Bukti kami
menunjukkan bahwa itu adalah yang terakhir.

3 PENGEMBANGAN PREDIKSI
Sebagaimana dibahas di atas, dugaan kami adalah bahwa tanda hubungan antara istilah smoothing dan kontrak utang akan
tergantung pada apakah pemberi pinjaman mengambil informasi sinyal atau garbling pandangan smoothing, karena
pandangan-pandangan tive alterna- memiliki efek terarah berlawanan pada diharapkan kerugian kredit. Jika pemberi pinjaman
mengambil sinyal informasi view (yaitu, smoothing dikaitkan dengan probabilitas yang lebih rendah dari default, seperti di
Merton, 1974), kami memprediksi hubungan negatif antara smoothing dan biaya utang, ceteris paribus. Jika pemberi pinjaman
mengambil informasi garbling view (yaitu, smoothing terkait dengan kerugian yang diperkirakan lebih tinggi diberikan default),
kami memprediksi hubungan positif antara smoothing dan biaya utang, sebagai dokumen sastra sebelumnya bahwa harga
pemberi pinjaman melindungi terhadap ancaman konsumsi manfaat swasta di lingkungan kontraktor (Lin et al., 2011).
Selanjutnya, kami memperkirakan bahwa rata-rata, pemberi pinjaman lebih mungkin akan mengambil informal mation signaling
(memutarbalikkan) pandangan dalam lingkungan di mana ada lebih kuat (lemah) penegakan hukum dan keras hukuman (ringan)
yang terkait dengan konsumsi manfaat pribadi manajerial.
Prediksi ini meningkatkan beberapa pertanyaan alami. Pertama, jika smoothing memang terkait dengan biaya yang lebih
rendah dari utang dalam lingkungan dengan ancaman rendah konsumsi manfaat pribadi, mengapa semua manajer di lingkungan
mereka yang tidak
9
 literatur lain terkait mendokumentasikan hubungan positif antara perataan laba dan kredit peringkat, konsisten dengan dominasi
menandakan pandangan smoothing (misalnya, Gu & Zhao, 2006; Jung, Soderstrom, & Yang, 2013).
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halus pada tingkat yang sama? Setidaknya ada dua alasan. Kami berharap variasi cross-sectional di tingkat smoothing antara
peminjam di ancaman rendah lingkungan hanya karena tidak semua peminjam memiliki kemampuan yang sama untuk
kelancaran, atau karena peminjam yang dapat memperlancar tetapi tidak memiliki penghasilan ekonomi yang halus akan
mengorbankan smoothing untuk melaporkan jujur, karena tidak melakukannya adalah mahal.
Pertanyaan kedua yang muncul adalah, jika perusahaan perlu berkomunikasi dengan pemberi pinjaman tentang risiko
perusahaan, mengapa mereka perlu menggunakan smoothing, daripada saluran informasi pribadi yang tersedia antara peminjam
dan pemberi pinjaman swasta? Memang benar bahwa peminjam memiliki saluran informasi pribadi dengan pemberi pinjaman,
dan oleh karena itu jika peminjam memiliki pendapatan ekonomi halus, dapat berkomunikasi yang secara pribadi kepada pemberi
pinjaman. Namun, jika seperti peminjam hipotetis memang memiliki pendapatan ekonomi halus, mereka akan cenderung untuk
mengatakan kebenaran dan mencerminkan bahwa dalam laporan keuangan publik, yaitu, mereka akan halus pendapatan, jika
tidak ada alasan lain selain untuk berkomunikasi kenyataan bahwa pasar modal lainnya peserta dengan siapa peminjam tidak
memiliki saluran informasi pribadi (misalnya, equityholders).
Pertanyaan ketiga adalah, jika smoothing dikaitkan dengan biaya yang lebih tinggi dari utang dalam lingkungan dengan
ancaman tinggi dari pri konsumsi manfaat vate, mengapa setiap perusahaan halus - yaitu, akan perlindungan harga pemberi
pinjaman tidak menghapus insentif smoothing? Singkatnya, jawabannya adalah tidak. Ada dua kategori utilitas-memberikan
manfaat pribadi yang manajer dapat mengkonsumsi - mereka yang mengambil nilai perusahaan (misalnya, kelebihan kompensasi,
tunneling), dan mereka yang tidak (misalnya, status menjalankan perusahaan, sosial dan profesional koneksi) (Aghion & Bolton,
1992). Pemberi pinjaman akan hanya harga melindungi terhadap konsumsi manfaat pribadi yang tegas-nilai ekstraktif. Oleh
karena itu, selama setiap non manfaat pribadi nilai-ekstraktif ada, manajer akan memiliki insentif untuk kelancaran, bahkan jika
pemberi pinjaman harga sepenuhnya melindungi terhadap konsumsi manfaat pribadi yang tegas-nilai extractive.10 Kemungkinan
lain termasuk pajak atau manfaat lindung nilai dari smoothing, atau hanya perlindungan harga parsial untuk konsumsi keuntungan
pribadi nilai-ekstraktif. Dalam hal apapun itu adalah keteraturan empiris bahwa smoothing dikaitkan dengan konsumsi manfaat
pribadi (misalnya, Leuz et al., 2003).
Dalam Lampiran B, kami menyajikan kerangka kerja yang sangat bergaya yang imbeds dinamika kita bahas di atas, yang
menyajikan satu kemungkinan di mana keseimbangan kami jelaskan bisa eksis dalam realitas. Artinya, kita menganggap sebuah
perusahaan yang manajer memiliki informasi pribadi tentang kelancaran pendapatan ekonomi, dan tidak dapat diamati (untuk
luar) kemampuan untuk baik halus atau tidak laba mulus. Lingkungan di mana manajer beroperasi ditandai sebagai memiliki
biaya tinggi atau rendah tertangkap mengkonsumsi manfaat pribadi, dan biaya tinggi atau rendah dikaitkan dengan salah
melaporkan laba ekonomi yang benar (misalnya, Desai, Hogan, & Wilkins, 2006). Manajer kemudian memilih apakah akan
mengkonsumsi manfaat pribadi dan apakah untuk kelancaran laba (jika mampu). Kami juga mencirikan potensi manfaat pribadi
dari dua bentuk: manfaat pribadi yang mengekstrak nilai perusahaan (dan karena itu akan harga dilindungi oleh penyedia modal),
dan mereka yang tidak (dan karena itu tidak akan harga dilindungi). Perusahaan kemudian mencari pinjaman pribadi. Pemberi
pinjaman dapat mengamati ancaman konsumsi manfaat swasta di lingkungan, dan apakah pendapatan halus. Kami menunjukkan
bahwa dalam suatu lingkungan dengan ancaman konsumsi yang tinggi, smoothing dikaitkan dengan biaya yang lebih tinggi dari
utang dalam (parsial) ekuilibrium - memang, pemberi pinjaman sepenuhnya harga melindungi terhadap konsumsi imbalan pribadi
nilai-mengurangi, tetapi keberadaan nilai non mengurangi manfaat pribadi masih membuatnya optimal dari perspektif manajer
untuk kelancaran pendapatan. Selanjutnya, kami menunjukkan bahwa dalam lingkungan dengan ancaman konsumsi rendah,
smoothing dikaitkan dengan biaya yang lebih rendah dari utang dalam (parsial) ekuilibrium, karena smoothing mengungkapkan
informasi tentang risiko perusahaan dengan kemungkinan rendah manfaat pribadi consumption.11
10 Perhatikan contoh memotivasi berikut, yang kita lebih formal mengembangkan dalam Lampiran B. Jika manajer memilih
untuk kelancaran mengkonsumsi non-nilai-ekstraktif manfaat pribadi (misalnya, untuk menghindari intervensi dan
mempertahankan pekerjaannya), pemberi pinjaman akan mengamati laba halus dan tidak akan dapat membedakan apakah
manusia- belasan mengkonsumsi nilai-ekstraktif atau non-nilai-ekstraktif manfaat pribadi. Dengan demikian, pemberi pinjaman
akan harga melindungi terhadap nilai-ekstraktif potensi ponent com-. Manajer tahu ini, sehingga manajer akan pergi ke depan dan
mengkonsumsi mereka nilai-ekstraktif manfaat pribadi, bersama dengan menikmati non-ekstraktif manfaat pribadi. Meskipun
perlindungan harga offset manfaat nilai-ekstraktif dikonsumsi oleh manajer, manajer tetap lebih baik dari manfaat pribadi
non-ekstraktif, yang hanya dapat dicapai melalui smoothing.
11
Atau, misalnya, kita bisa mencirikan suatu kerangka di mana perusahaan dibiayai dengan ekuitas, dan manajer membuat
smoothing keputusan dalam konteks itu. Kemudian, dalam periode masa depan ada peningkatan eksogen dalam peluang
pertumbuhan yang menyebabkan perusahaan untuk mencari pembiayaan utang. Hal ini mudah untuk menunjukkan bahwa
prediksi yang sama kami akan mengikuti dalam situasi ini di mana pilihan smoothing adalah eksogen terhadap keputusan
pinjaman.
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4 PENELITIAN DESAIN
4.1 Penghasilansmoothing
Labakelancaran terdiri dari kehalusan yang didorong oleh proses alam bisnis dan siklus operasi perusahaan dan penerapan
peraturan akuntansi non-discretionary untuk proses-proses (yaitu, kelancaran tal fundamentalisme ), serta kehalusan yang
didorong oleh kebijaksanaan manajerial (yaitu, diskresioner smoothing). Tantangan empiris kunci menguraikan kelancaran
diamati dalam ini komponen--komponen fundamental dan diskresioner (Dechow et al., 2010) .12 Untuk melakukannya, kita erat
mengikuti pendekatan di Lang & Maffett (2011b) dan Lang et al. (2012) .13
Setelah Lang et al. (2012) pendekatan pertama kita menghitung dua langkah alternatif pendapatan keseluruhan polos ness
untuk perusahaan iin periodt, yang kita denoteSmooth1
i, t
andSmooth2
i, t
.Smooth1is negatif dari rasio standar deviasi dari laba operasi
dengan standar deviasi arus kas operasi, di mana laba dan arus kas ditingkatkan oleh total aset tertinggal sebelum perhitungan
standar deviations.14 nilai-nilai yang lebih besar dari Smooth1 menunjukkan lebih perataan laba. Smooth2 adalah negatif korelasi
antara akrual dan arus kas operasi (baik skala dengan total aset tertinggal) selama periode tahun tiga sampai lima berakhir pada
tahun t, di mana nilai-nilai yang lebih tinggi dari Smooth2 puncak-cate pendapatan yang lebih halus. Kedua, kita mundur
Smooth1 dan Smooth2 pada satu set Sisa-kegigihan mendasar yang diusulkan pendapatan kelancaran menggunakan estimasi
pooled berikut:
Smooth1
i, t
=φ
0
+
9Σ
f=1
φ
f
Z
i, tf
+ industri + tahun + ε
i,t
(1)
Smooth2
i,t
=φ
0
+
9∑
f=1
φ
f
Z
i,tf
+ industry + year + ε
i,t
(2)
where Z
fi,t
is the following vector of nine fundamental smoothness determinants (Lang et al., 2012): natural log of total assets
(LSize), a measure of firm size; leverage (Leverage), to capture differences in financing choices; book-to-market ratio (BTM), to
capture asset tangibility and expected earnings growth; standard deviation of firm i's annual sales (StdSales) over the three-to-five
year period ending in year t, to capture underlying operating volatility; percentage of years firm i experienced negative operating
earnings in the three-to-five year period ending in year t (%Loss), to cap- ture differences in accrual properties of loss
observations; operating cycle (OpCycle); average annual sales growth over the three-to-five year period ending in year t
(AvgSalesGrowth), to capture growth opportunities; operating leverage (OpLev), to capture capital intensity; and average annual
cash flow from operations over the three-to-five year period ending in year t (AvgOpCash), to capture general profitability
level.15 When estimating Equations (1) and (2), we fur- ther include industry and year fixed effects to capture different accrual
properties across industries, and to control for macro-economic cycles. We define discretionary smoothing (fundamental
smoothness) as the residual (predicted value) from Equations (1) and (2), denoted DiscSmooth1
i,t
and DiscSmooth2
i,t
(FundSmooth1
i,t
and FundSmooth2
i,t
), respectively.
12
We note that, although lenders may attempt to estimate the extent of a borrower's discretionary smoothing in an attempt to
unravel the manager's inter- vention relative to the unsmoothed earnings stream, this may not be strictly necessary to generate our
predictions. In other words, it is possible that if lenders are unable to do this unraveling and simply use the extent of observed
smoothness as a proxy for discretionary smoothing (together with their assessment of whether the threat of private benefits
consumption is low or high), cost of debt will be higher (lower) in high (low) threat environments when the borrower has a
relatively smooth income stream, on average.
13
We appreciate the difficulties and concerns inherent in performing this decomposition. However, Lang et al. (2012, pp.
768–770) conduct and report exten- sive construct validity tests on this measure in their appendix. Moreover, this measure has
been used frequently in recent literature (eg, Friedman, 2017; Hamm, Jung, & Lee, 2017; Lang & Stice-Lawrence, 2015).
14
 We compute operating cash flow as net income before extraordinary items minus accruals. We compute accruals as the change
in current assets less the change in current liabilities less the change in cash plus the change in current debt less depreciation and
amortization. The standard deviations are estimated using no fewer than three and no more than five annual observations ending
in year t.
15 Detailed variable definitions are presented in Appendix A.
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Next, we construct the firm-year measure of income smoothing, DiscSmooth
i,t
, as the average of firm i's within- country
percentile rank values of DiscSmooth1 and DiscSmooth2:
DiscSmooth
i,t
=
(PcntileDiscSmooth1
i,t
+2
PcntileDiscSmooth2
i,t
)
. (3)
By construction, PcntileDiscSmooth1, PcntileDiscSmooth2 and DiscSmooth each ranges from 0 to 99. We similarly con- struct a
firm-year measure of fundamental smoothness, FundSmooth
i,t
, as the average of firm i's within-country per- centile rank
values of FundSmooth1 and FundSmooth2.

4.2 Threat of private benefits consumption

By definition, value-extractive private benefits consumption by firm insiders is detrimental to all external capital providers,
including private lenders. Expropriation of firm assets by insiders leaves fewer resources inside the firm to satisfy the claims of
both creditors (eg, Lin et al., 2011) and minority shareholders (eg, Djankov, La Porta, Lopez- de-Silanes, & Schleifer, 2008). To
capture this broad threat of private benefits consumption in the contracting environ- ment, for our primary test we use the
country-level anti-self-dealing index of Djankovde et al. (2008), which has been used in prior debt literature to establish that
lenders price protect against private benefits consumption threat (Lin et al., 2011). This index, computed for 72 countries, focuses
on both public and private enforcement mechanisms (eg, litigation, fines, prison terms) that govern a hypothetical self-dealing
transaction. Higher (lower) values of the index imply more (less) protection and enforcement against expropriation by corporate
insiders (ie, private benefits con- sumption). We define a country-level indicator variable, PBThreat, that equals one if the
anti-self-dealing index of firm i's country is below the sample observation median (suggesting a relatively high threat of private
benefits consump- tion), and zero otherwise.
We note that extant literature offers several institutional measures of creditor protection. For example, Djankov, McLiesh, &
Shleifer (2007) develop a debt enforcement index, which reflects the ability of creditors to enforce their claims once a firm
becomes insolvent. However, these creditor protections would do nothing to alleviate creditors' concerns that managers may
expropriate firm assets, which would leave the lenders with higher loss given default. Therefore, such measures do not directly
capture our construct of interest. Stated differently, we are interested in cap- turing the threat of managerial private benefit
consumption prior to insolvency, not the ability of creditors to enforce debt contracts after insolvency. We discuss this issue
further in Section 6.5.

4.3 General empirical setup

To test our predictions concerning the relationship between cost of debt, income smoothing, and the threat of private benefits
consumption in the contracting environment, we estimate the following empirical model with country and year fixed effects:16
Spread
i,l
=β
0
+β
1
PBThreat
i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
FundSmooth
i,t + β
5
, (4)
where Spread is the loan spread over LIBOR for firm i's loan facility l. PBThreat is an indicator that equals one (zero) if firm i's
environment suggests a high (low) threat of private benefits consumption, as described above.17 We conduct supplemental
analyses using firm-level threat measures, which we subsequently describe along with the
16
We use two-way clustered standard errors by both nation and loan package throughout our analyses. Inferences are not
qualitatively altered if we replace the package-based clusters with either firm clusters or calendar month-year clusters (eg, January
2010, February 2010). Further, although we include indus- try fixed-effects in our smoothing regressions (ie, Equations (1) and
(2)), we consider a specification that includes industry fixed effects, and inferences are unaltered. Accordingly, for parsimony we
do not include industry fixed effects in our primary specification.
17
When using a country-level threat measure with country fixed effects, the main effect on PBThreat simply captures the
incremental average spread of an omitted country. Accordingly, including or excluding this main effect does not change
coefficient estimates on any other variables (including the interactions) in the regression.
FundSmooth ∗ PBThreat + αX
i,t
+ αY
i,l
+ country + year + ε
i,l
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48 AMIRAM
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associated analyses. DiscSmooth (FundSmooth) is firm i's discretionary income smoothing (fundamental earnings smoothness)
computed for the most recent fiscal year-end prior to entering the debt contract. We include FundSmooth (and its interaction with
PBThreat) to control for any effects of non-discretionary smoothness on cost of debt. Our prediction that the information
signaling view of smoothing is dominant in environments with low threat of private benefits consumption suggests β
2
< 0 (ie, smoothing is associated with lower cost of debt). Our prediction that the information
garbling view of smoothing prevails in high threat environments suggests (β
2
+β
3
) > 0 (ie, smoothing is associated with
higher cost of debt).
X
i,t
is a vector of the following firm-level control variables, where t references the most recent fiscal year-end prior to loan
inception: LSize (natural log of total assets in US dollars), BTM (book to market ratio), Leverage (leverage, mea- sured as the
ratio of total liabilities to total assets), ROA (return on assets, measured as the ratio of earnings before interest and taxes to total
assets), Tangible (asset tangibility, measured as the ratio of property plant and equipment to total assets), and StdRet (standard
deviation of firm i's monthly returns). Y
i,l
is a vector of the following loan-level control
variables for firm i's loan facility l: Secure (an indicator that equals one if the loan requires collateral), LMaturity (natural log of
loan maturity in months), LFacility (natural log of the loan facility face amount in US dollars), and NCov (the number of financial
covenants attached to the loan package that contains facility l). All variables are defined in Appendix A.

5 DATA AND DESCRIPTIVE STATISTICS

We obtain international data on bank loans from Dealscan.18 The most primitive unit of observation is a loan facility, where
multiple facilities can be included in a loan package between a borrower and lender. Because each loan facility within a package
typically has a unique combination of terms (eg, spread, maturity, collateral requirements, amount) and abstracting away from
this detail can lead to biased results, we follow a common approach in the accounting liter- ature and use a loan facility (rather
than loan package) as our base unit of observation (eg, Amiram, Kalay, & Sadka, 2017; Bharath et al., 2008; De Franco, Hope, &
Lu, 2017), and include loan package as a standard error clustering dimension. We collect accounting and stock price data from
Worldscope and Datastream, respectively, and convert all non-ratio variables into US dollars. We obtain data on firm-level
probability of default (PD) from the Credit Research Initiative (CRI) of the National University of Singapore.19
Our sample begins with 117,817 loan facilities in Dealscan with non-missing loan spread with loan initiation dates ranging
from 1996 to 2009, and where borrowers are not banks or utilities (two digit ICB codes 70, 83, 85 and 87). We next match the
Dealscan sample to Worldscope by company name, reducing our sample to 48,458 loan facilities. We retain in our sample loans
with expected maturity (at loan inception) of greater than 12 months (eg, Demiroglu & James, 2010), further reducing our sample
to 37,550 loan facilities. We next eliminate observations that have missing values for our computed discretionary smoothing
metrics, leaving 16,410 facility-level observations. Because of the disproportionate number of US observations in Dealscan, for
our primary country-level analysis we exclude all obser- vations for US borrowers, reducing our sample to 4,588 facilities.20
Next, we truncate all continuous variables used in our analyses at the lower 1% and upper 99% values by country-year, and delete
observations with missing values for loan characteristics (ie, spread, maturity, number of covenants, face amount), accounting
data, or any other data necessary for our analyses, as described below. This leaves us with 1,817 facility-level observations across
1,084 loan packages for 639 distinct non-US borrowers across 20 countries.
18 International Dealscan loan data have been used extensively in extant accounting and finance literature (eg, Bae & Goyal,
2009; Kim, Tsui, & Cheong, 2011; Lin et al., 2011; Qian & Strahan, 2007).
19 The firm-level probability of default measures we employ are computed by the CRI using a forward default intensity model, as
outlined in Duan, Sun, and Wang (2012). Please refer to www.rmimcri.org for more details.
20 We estimate a firm-level analysis using a US sample. We discuss the sample along with the associated results in Section 6.2.
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TABLE1 Non-US sample composition
Firms Facilities
Nation N % N %
Anti-Self Dealing Index PBThreat
Australia 14 2.2 29 1.6 0.76 0
Brazil 2 0.3 2 0.1 0.27 1
Canada 69 10.8 160 8.8 0.64 0
France 72 11.3 281 15.5 0.38 1
Germany 28 4.4 90 5.0 0.28 1
Hong Kong 25 3.9 44 2.4 0.96 0
India 18 2.8 33 1.8 0.58 0
Italy 8 1.3 12 0.7 0.42 1
Korea (South) 23 3.6 71 3.9 0.47 1
Mexico 5 0.8 7 0.4 0.17 1
Netherlands 8 1.3 15 0.8 0.20 1
Singapore 8 1.3 9 0.5 1.00 0
South Africa 2 0.3 6 0.3 0.81 0
Spain 12 1.9 19 1.1 0.37 1
Sweden 4 0.6 4 0.2 0.33 1
Taiwan 143 22.4 377 20.8 0.56 0
United Kingdom 198 31.0 658 36.2 0.95 0
Total 639 100.0 1,817 100.0
Table 1 presents the country distribution of the sample firms and facility-level observations used in our primary analyses.
Anti-self-dealing index (Djankov et al., 2008) takes values in the range zero to one, where higher values indicate a lower threat of
private benefit consumption. A country is classified as having high (low) threat of private benefits consumption if its anti-
self-dealing index is below (above) the sample observation median. PBThreat is an indicator variable that = 1 ( = 0) for high (low)
threat countries. For simplicity, we follow prior research (eg, Daske, Hail, Leuz, & Verdi, 2008) and refer to Hong Kong as a
country.
Table 1 presents details of the sample country distribution. The country distribution of firms and facility-level obser- vations
are similar, with Taiwan and the United Kingdom representing a large fraction of the sample (22% and 31% of facility-level
observations, respectively), where both countries are classified as having low threat of private benefit consumption. Among
countries classified as having high threat of private benefit consumption, France and Germany are prominent within the sample
(11% and 4% of facility-level observations, respectively). We acknowledge that our sample composition reflects potential
selection bias driven by two requirements: firms must exist in both Dealscan and Datastream with data for all of our required
variables, and we must be able to obtain valid matches across the two datasets. This may limit the generalizability of our results to
loans between relatively large banks and large borrowers. Further, as the data only allow us to examine loans that were actually
issued, we note that our sample may underrepre- sent firms in countries where borrower access to credit is limited because of
generally poor contracting environments. However, these limitations are standard in this literature (eg, Qian & Strahan, 2007).
Table 2 presents descriptive statistics for firm and facility-level variables. Mean total assets in US dollars is 3.8 billion (ie,
mean logged assets of 14.01). Mean book-to-market ratio is 0.71, and mean leverage ratio is 0.59. The median sam- ple loan has a
100 basis point spread over LIBOR, a face amount of US$ 140 million, a five-year maturity, no collateral requirements and no
financial covenants.21 Table 3 presents correlations for facility-level observations.
21
When Dealscan reports no covenant data for a given loan package, we make the assumption that the number of covenants on
the loan package is zero. While this assumption is common in the literature, Drucker and Puri (2009) points out that this
assumption is questionable, particularly for non-US loans. Throughout the study, inferences are unchanged if we do not include
the number of covenants in our analyses.
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50 AMIRAM
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TABLE2 Sample descriptive statistics
Variable N Mean Std P1 P25 Median P75 P99
DiscSmooth 1,817 49.323 26.839 2.000 26.500 50.500 71.500 97.000
FundSmooth 1,817 51.796 27.598 2.500 29.000 51.500 74.500 97.000
Spread 1,817 134.413 108.854 19.000 55.000 100.000 200.000 525.000
Facility 1,817 462.163 987.631 0.183 23.164 140.000 440.767 4708.474
LFacility 1,817 4.301 2.563 −1.699 3.143 4.942 6.089 8.457
Maturity 1,817 64.216 21.929 24.000 60.000 60.000 75.000 144.000
LMaturity 1,817 4.105 0.346 3.178 4.094 4.094 4.317 4.970
Secure 1,817 0.254 0.436 0.000 0.000 0.000 1.000 1.000
NCov 1,817 0.569 0.929 0.000 0.000 0.000 1.000 4.000
LSize 1,817 14.006 1.477 11.015 12.967 13.923 14.982 17.689
BTM 1,817 0.714 0.480 0.009 0.380 0.612 0.942 2.117
Leverage 1,817 0.591 0.149 0.265 0.491 0.588 0.680 0.980
ROA 1,817 0.080 0.068 −0.109 0.044 0.076 0.114 0.235
NetWorth 1,817 11.396 19.601 0.037 0.666 2.761 12.073 86.318
Tangible 1,817 0.389 0.245 0.015 0.178 0.362 0.565 0.93 5
StdRet 1,817 0.106 0.052 0.031 0.070 0.097 0.129 0.292
Table 2 presents descriptive statistics for the facility-level observations used in our analyses. Variable definitions are presented in
Appendix A.

6 EMPIRICAL RESULTS
6.1 Country-level threat of private benefits consumption
Table 4 presents results from estimation of Equation (4). Column (3) presents results from our primary specification, which tests
our two key predictions. As predicted, β
2
is significantly negative (coefficient estimate –0.145; t-statistic –2.38), which
documents a negative association between income smoothing and cost of debt for firms within countries characterized by a low
threat of private benefits consumption. This is consistent with our prediction that, on aver- age, lenders perceive smoothing to
reflect signaling in such environments. In stark contrast, the interaction between smoothing and the high threat indicator (β
3
) is significantly positive (coefficient estimate 0.410; t-statistic 2.86), result- ing in a
significantly positive total coefficient on firm-level smoothing in high threat countries of 0.265 (β
2
+β
3
). As predicted, this
provides evidence of a positive association between smoothing and cost of debt for firms within coun- tries characterized by a
high threat of private benefits consumption, consistent with lenders on-average perceiving smoothing to reflect garbling in high
threat countries.
Although statistically insignificant, there is a negative sign on the association between non-discretionary earnings smoothness
(FundSmooth) and loan spread, which is consistent with such smoothness being reflective of lower risk. More importantly,
consistent with our intuition there is no difference in the association between non-discretionary smoothness and spread across
consumption threat regimes, as reflected by the insignificant FundSmooth*PBThreat interaction (coefficient estimate –0.035;
t-statistic –0.11). For parsimony, hereafter we omit this interaction from our (country-level) empirical tests.
The results for the firm-level control variables are generally consistent with our expectations. Market-to-book has been used by
numerous studies as a proxy for conservatism (eg, Roychowdhury & Watts, 2007). Because book- to-market (its reciprocal) is
decreasing in conservatism, the positive coefficient on book-to-market (BTM) is consis- tent with literature that documents that
ex-ante conservatism lowers cost of debt (eg, Zhang, 2008). Larger (LSize) firms have lower cost of debt. Firms with more
leverage (Leverage) and volatility (StdRet) have higher cost of debt.
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TABLE4 Country-level threat of private benefits consumption
Column: (1) (2) (3) (4)
DiscSmooth −0.038 −0.145** −0.145** −0.131*
(−0.39) (−2.14) (−2.38) (−1.93)
DiscSmooth *PBThreat 0.410*** 0.410*** 0.433**
(2.64) (2.86) (2.46)
FundSmooth −0.184 −0.166 −0.166 −0.368**
(−1.16) (−1.38) (−1.37) (−2.38)
FundSmooth *PBThreat −0.035 −0.035 −0.101
(−0.11) (−0.11) (−0.36)
LSize −14.238*** −14.086*** −14.086*** −12.240***
(−5.91) (−5.65) (−6.11) (−5.84)
BTM 22.867*** 22.941*** 22.941*** 20.040***
(4.37) (3.95) (3.74) (3.13)
Leverage 46.003*** 43.602*** 43.602*** 35.640***
(4.30) (3.79) (4.07) (2.70)
ROA −3.530 −0.809 −0.809 −1.346
(−0.07) (−0.02) (−0.02) (−0.03)
Tangible 1.156 2.970 2.970 −5.908
(0.10) (0.27) (0.26) (−0.58)
StdRet 213.822** 225.143** 225.143** 213.077*
(1.98) (2.07) (1.98) (1.94)
NCov 4.030 4.253 4.253 4.271
(1.16) (1.23) (1.30) (1.23)
LFacility −10.831*** � ��10.725*** −10.725*** −11.197***
(−3.09) (−3.03) (−3.02) (−3.28)
LMaturity 70.433*** 70.278*** 70.278*** 68.224***
(3.36) (3.36) (3.34) (3.14)
Secure 64.170*** 63.676*** 63.676*** 63.475***
(2.98) (3.00) (2.99) (2.97)
DiscSmooth+ DiscSmooth*PBThreat 0.265* 0.265* 0.302*
Included Fixed Effects C, YC, YC, YC, Y, I
Standard Error Clustering C, MC, MC, PC, P
N 1,817 1,817 1,817 1,817
Adj. R2 0.437 0.438 0.438 0.442
Table 4 presents results of OLS estimation of Equation (4):
Spread
i,l
=β
0
+β
1
PBThreat i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
FundSmooth
i,t + β
5
FundSmooth ∗ PBThreat + αX
i,t
+ αY
i,l
+ country + year + ε
i,l
.
Spread is the loan interest rate over LIBOR in basis points. PBThreat is an indicator that equals one (zero) if a firm is in a coun-
try with high (low) threat of private benefits consumption. DiscSmooth is a rank variable increasing in firm-level discretionary
smoothing.FundSmooth is a rank variable increasing in firm-level fundamental smoothness. All variables are further defined in
Appendix A. Country, year, and industry fixed effects (including the intercept and main effect of PBThreat) are included where
indicated but not reported. Robustt-statistics based on two-way clustered standard errors are reported in parentheses, where C, M,
and P indicate clustering by country, calendar month-year, and loan package, respectively. *, **, and *** indicate significance
(two-sided) at the 10%, 5% and 1% levels, respectively.
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Consistent with Bharath et al. (2008) and Costello & Wittenberg-Moerman (2011), there is a negative relationship between loan
amount (LFacility) and spread, and a positive association between maturity (LMaturity) and spread. Fur- ther consistent with
Bharath et al. (2008) and Berger & Udell (1990), there is a strong positive relationship between collateral requirement (Secure)
and spread. These relations reflect a complex set of unobservable tradeoffs in the loan contracting process.
In terms of economic significance, there is a material difference in the effects of smoothing on cost of debt across low and high
private benefit consumption threat environments. In low threat countries, movement across the interquartile range of
DiscSmoothresults in an approximate 7 basis point decrease in loan spread (ie, interquartile range of 45 times the coefficient
estimate of –0.15), which represents a 7% decrease in spread relative to the median sample spread. In high threat countries,
movement across the interquartile range of DiscSmooth results in an approximate 12 basis point increase in loan spread (ie,
interquartile range of 45 times the total coefficient estimate of 0.265), which represents a 12% increase in loan spread relative to
the median spread.22
Column (1) reports results from a more naive specification of the relationship between smoothing and cost of debt, where we
do not partition based on the private benefits consumption threat, which indicates an insignificant rela- tionship between
smoothing and cost of debt. However, we now know from column (3) that this insignificance simply reflects the contrasting
negative and positive relationships across environments. Accordingly, without considering the forces we reveal, researchers may
make inappropriate conclusions concerning the relationship between smoothing and cost of private debt.
Although our sample includes only a limited number of firms that receive loans more than once during our sample period (ie,
271 firms), we repeat our main test with firm fixed effects. This design is extremely strict, in that all of the variation in the effect
of smoothing on cost of debt comes from within-firm time series variation in smoothing using a very small number of firms with
multiple observations. Untabulated findings are nonetheless consistent with our main inferences. That is, within firm there is a
significant negative (positive) relationship between the extent of smoothing and cost of debt if that firm is operating in a low
(high) threat environment. This design further mitigates concern that our primary inferences are driven by correlated omitted
variables.

6.2 Firm-level threat of private benefits consumption

Our primary results provide evidence that, on average, lenders interpret smoothing in a manner consistent with the sig- naling
(garbling) view of smoothing in countries with low (high) threat of private benefits consumption. However, our results do not
imply that smoothing is associated with lower (higher) cost of debt for all firms in low (high) threat coun- tries. To the extent that
lenders distinguish among firms within a given country in terms of their view of smoothing, it is likely that there are firm-specific
cases in low (high) threat countries where smoothing is associated with an increased (decreased) cost of debt.
One issue with pursuing a within-country analysis based on firm-level threat characteristics is that within a coun- try, such
firm-level characteristics are likely to be endogenous (ie, a firm can choose both smoothing and governance structure). However,
with that caveat in place, we estimate Equation (4) using a time-varying firm-level measure of the threat of private benefits
consumption. That is, using our foreign sample we replace PBThreat with CloseHeldShares
i,t
, which is an
indicator that equals one if firm i's percentage of closely held shares in year t is in the top quartile of sample observations (ie,
greater than 45.75%), and equals zero otherwise. Ownership concentration enables more efficient expropriation of private
benefits, thus a high level of closely held shares reflects a relatively high threat of private ben- efits consumption (La Porta,
Lopez-de-Silanes, Shleifer, & Vishny, 2000).23
22
These effects are economically significant, with magnitudes comparable to effects documented in Bharath et al. (2008).
Specifically, Bharath et al. (2008) finds a 14 basis point increase in loan interest spread over LIBOR in going from firms in the
worst to best quintiles of accounting quality.
23
We acknowledge that in some settings, ownership concentration can provide governance benefits to a firm. However, the
prevailing interpretation in the literature is that ownership concentration enables private benefits extraction.
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Column (1) of Table 5 presents results from this analysis, which are remarkably similar to results from our primary analysis
using the country-level threat measure. These results provide nice identification, in that the effect we docu- ment in our primary
analysis likewise operates within-country based on time-varying firm-level threat characteristics. That is, β
2
is significantly negative (coefficient estimate –0.182; t-statistic –1.65), which documents a negative associa- tion
between income smoothing and cost of debt for firms that have low threat of private benefits consumption, holding country-level
threat characteristics constant. Moreover, there is a significantly positive total coefficient on firm-level smoothing in high-threat
firms of 0.471 (β
2
+β
3
), which provides evidence of a positive association between smoothing and cost of
debt. To fix intuition with an example, these results illustrate that, whereas our primary analysis in Table 4 suggests that
smoothing firms in the UK (a low threat country) tend to have lower cost of debt on average, and that smoothing firms in
Germany (a high threat country) tend to have higher cost of debt on average, within either the UK or Germany smoothing firms
with low (high) private benefits consumption threat have relatively low (high) cost of debt.
We repeat our firm-level threat analysis for a separate sample of US firms for which Bebchuk et al. (2009) compute a
firm-level composite managerial entrenchment index.24 The entrenchment index reflects the potential for the threat of private
benefits consumption using six Investor Responsibility Research Center provisions (accordingly, the measure ranges from zero to
six) (eg, John, Litov, & Yeung, 2008; Rego & Wilson, 2012). Specifically, we construct an indicator MgrEntrench
i,t
that equals one if firm i's entrenchment index in year t is greater than three, and equals zero otherwise.25 The US
sample we use in this analysis consists of 6,033 facility-level observations across 4,570 loan packages for 1,453 distinct
borrowers. As reported in column (2) of Table 5, inferences from the within-US firm-level analysis mirror those from our primary
analysis.

6.3 Borrower credit risk

Our results thus far suggest that lenders adjust loan spread based on their interpretation of the implications of observed smoothing
for expected credit loss. However, because lenders only lose money if a borrower actually defaults, lenders may be relatively
insensitive to the positive or negative implications of smoothing for borrowers with rela- tively low credit risk. In high private
benefits consumption threat environments, if it is more likely that a borrower will default, lenders may be more concerned with
the implications of private benefits consumption because such actions will more likely affect their ultimate payoff. Accordingly,
we predict that the positive association between smoothing and cost of debt in high threat countries will be exacerbated if the
borrower has relatively high risk of default. To test this prediction, we estimate the following modification to Equation (4), which
includes our new variable of interest, DiscSmooth*PBThreat*PD, where PD is the borrower's one-year-ahead probability of
default as of the end of the month immediately preceding the loan contracting date:
Spread
i,l
=β
0
+β
1
PBThreat
i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
DiscSmooth ∗ PBThreat ∗ PD +β
5
FundSmooth
i,t
+β
6
PD
i,t
+β
7
DiscSmooth ∗ PD + β
8
FundSmooth ∗ PD
, (5)
+β
9
PBThreat ∗ PD + αX
i,t
+ αY
i,l
+ country + year + ε
i,l
where all variables are as previously defined, andDiscSmooth*PBThreat*PD captures the incremental effect of probabil- ity of
default on the relationship between smoothing and loan spread in high consumption threat environments, which we predict will
be positive.
We report results in Table 6. As predicted, the coefficient on DiscSmooth*PBThreat*PD is positive and significant (coefficient
estimate 0.793; t-stat 2.14). Because PD is a continuous measure, all lower order coefficients are techni- cally uninterpretable;
however, signs and significance levels are consistent with prior results. For example, the coef- ficient on DiscSmooth is
significantly negative, reinforcing the result that smoothing reduces spread in countries with
24
The US is a low threat country, having an anti-self-dealing index of 0.65.
25
We note that, in contrast to our primary measure based on the anti-self-dealing index, literature has shown that managerial
entrenchment can benefit debtholders by providing takeover defenses (in the presence of shareholder-debtholder conflicts) (eg,
Ashbaugh-Skaife, Collins, & LaFond, 2006). However, as this is a limited setting, we rely on the more general interpretation of
entrenchment as enabling private benefits extraction.
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TABLE5 Firm-level threat of private benefits consumption
PBThreatFirm Var.: CloseHeldShares MgrEntrench
Column: (1) (2)
DiscSmooth −0.182* −0.101*
(−1.65) (−1.73)
DiscSmooth *PBThreatFirm 0.653*** 0.389**
(3.18) (2.56)
FundSmooth −0.056 −0.396***
(−0.43) (−6.49)
FundSmooth *PBThreatFirm −0.399 −0.089
(−1.37) (−0.62)
LSize −15.419*** −8.503***
(−5.94) (−5.15)
BTM 23.391*** 9.693***
(3.35) (3.32)
Leverage 43.972* 113.466***
(1.66) (13.39)
ROA 10.825 −141.145***
(0.16) (−6.97)
Tangible 2.977 6.310
(0.24) (0.97)
StdRet 220.143*** 180.274***
(2.78) (6.24)
NCov 8.142** −1.119
(2.02) (−1.08)
LFacility −10.892*** −13.063***
(−5.13) (−7.99)
LMaturity 71.423*** 23.156***
(6.57) (4.53)
Secure 69.988*** 78.072***
(7.16) (22.66)
DiscSmooth+ DiscSmooth*PBThreatFirm 0.471** 0.288**
Included Fixed Effects C, YY
Standard Error Clustering C, PC, P
N 1,608 6,033
Adj. R2 0.454 0.465
Table 5 presents results of OLS estimation of Eq. (4) using firm-level threat measures:
Spread
i,l
=β
0
+β
1
PBThreatFirm
i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreatFirm + β
4
FundSmooth
i,t + β
5
FundSmooth ∗ PBThreatFirm + αX
i,t
+ αY
i,l
+ country + year + ε
i,l
.
Spread is the loan interest rate over LIBOR in basis points. CloseHeldShares is an indicator that equals one (zero) if a firm has a
high (low) percentage of closely-held shares.MgrEntrenchis an indicator that equals one (zero) if a firm has a high (low) Bebchuk
et al. (2009) entrenchment index. DiscSmoothis a rank variable increasing in firm-level discretionary smoothing.FundSmooth is a
rank variable increasing in firm-level fundamental smoothness. All variables are further defined in Appendix A. Column (1) uses
our primary sample with two-way clustered standard errors by country and loan package. Column (2) uses a sample of US firms
with standard errors clustered by loan package. Where indicated, country and year fixed effects are included but not reported,
including the intercept and the main effect ofPBThreatFirm. Robust t-statistics are reported in parentheses. *, **, and *** indicate
significance (two-sided) at the 10%, 5% and 1% levels, respectively.
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TABLE6 Borrower credit risk
Column: (1) (1), cont.
DiscSmooth −0.188*** BTM 19.321*
(−2.76) (1.90)
DiscSmooth*PBThreat 0.188 Leverage 32.707*
(0.51) (1.71)
DiscSmooth* PBThreat*PD 0.793** ROA 32.072
(2.14) (0.55)
FundSmooth 0.120 Tangible 13.163
(0.55) (0.87)
PD 79.111*** StdRet 140.198
(3.17) (1.09)
DiscSmooth*PD 0.318 NCov 5.647**
(1.47) (2.25)
FundSmooth*PD −1.542*** LFacility −9.257**
(−3.66) (−2.07)
PBThreat*PD 13.327 LMaturity 62.597**
(0.56) (2.20)
LSize −14.894*** Secure 52.883**
(−6.42) (2.43)
Included Fixed Effects C, Y
Standard Error Clustering C, P
N 1,309
Adj. R2 0.414
Table 6 presents results of OLS estimation of Equation (5):
Spread
i,l
=β
0
+β
1
PBThreat i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
DiscSmooth ∗ PBThreat ∗ PD + β
5
FundSmooth
i,t + β
6
PD
i,t
+β
7
DiscSmooth ∗ PD + β
8
FundSmooth ∗ PD + β
9
PBThreat ∗ PD + αX
i,t
+ αY
i,l
+ country + year + ε
i,l
.
Spread is the loan interest rate over LIBOR in basis points. PBThreat is an indicator that equals one (zero) if a firm is in a country
with high (low) threat of private benefits consumption. DiscSmooth is a rank variable increasing in firm-level discre- tionary
smoothing. FundSmoothis a rank variable increasing in firm-level fundamental smoothness.PDis firm-level probability of default.
All variables are further defined in Appendix A. Country and year fixed effects (including the intercept and main effect of
PBThreat) are included but not reported. Robust t-statistics based on two-way clustered standard errors by coun- try and loan
package are reported in parentheses. *, **, and *** indicate significance (two-sided) at the 10%, 5% and 1% levels, respectively.
a low threat of private benefits consumption. To summarize, these results provide evidence that lenders pay particu- lar attention
to smoothing and its implications for potential private benefits consumption for firms that are closer to default, particularly when
smoothing more likely reflects garbling which may increase loss given default.

6.4 Non-price loan terms

Although our interest in this paper is the relationship between smoothing and the cost of debt, we analyze whether income
smoothing differentially affects several non-price loan terms that lenders may adjust to reflect perceived bor- rower risk across
environments, including financial covenants, maturity and collateral requirements. To do so, we use the basic variable structure of
Equation (4), while changing the dependent variable and estimation approach as appropriate.
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Conceptually, there are competing forces concerning the effect of smoothing on the use of financial covenants. Con- sider
environments with high threat of private benefits consumption – if smoothing represents garbling, then lenders may want to
increase the use of financial covenants to provide further protections; however, garbling suggests that the resulting financial data
are less reflective of underlying economics, which suggests that lenders may want to rely less on financial covenants (eg, Costello
& Wittenberg-Moerman, 2011).
Aside from this tension, investigating the effect of smoothing on the inclusion of loan covenants is problematic because of
international Dealscan data issues (Drucker & Puri, 2009). In particular, in Dealscan the absence of covenant data does not
necessarily imply that no loan covenants exist, and this problem is particularly acute for the non-US Dealscan sample. Therefore,
to empirically explore this relationship we first delete all observations with no covenant data, and estimate a variation of Equation
(4) with the number of financial covenants attached to the loan (NCov) as the dependent variable using the resulting sample of
724 observations. As reported in Table 7, we find that smoothing is indeed positively associated with the number of covenants
attached to the loan in environments with high threat of private benefits consumption (coefficient estimate on DiscSmooth*Threat
of 0.007; t-statistic 2.15). This result suggests that in addition to increasing loan spread, lenders may also use increased covenant
protections when smoothing more likely reflects garbling to facilitate private benefits consumption.
To examine whether smoothing affects loan maturity (collateral requirements), we estimate an OLS model of the form used in
Equation (4) with LMaturity (Secure) as the dependent variable. To summarize, in untabulated results we find no statistically
significant evidence that the threat of private benefits consumption in the contracting environment affects the relationship between
smoothing and either maturity or collateral requirements.26

6.5 Additional considerations

6.5.1 Private benefits consumption vs. creditor rights
As discussed previously, our construct of interest is the threat that firm insiders will consume private benefits as the firm
continues its ongoing operations. Our construct of interest is not creditor rights in the event of default, as such creditor
protections would do little to alleviate a lender's concern that managers may expropriate firm assets prior to default, which would
leave the lenders with fewer recoverable assets in default. Therefore, we do not view creditor rights as a meaningful delineator of
the effect of smoothing on cost of debt. Accordingly, we predict that there will be no differential association between smoothing
and loan spread across partitions based on the degree of creditor rights that exist in the event of default.
To test this prediction, we repeat our primary analysis after replacing PBThreat with WeakCredRights
i
, an indicator variable that
equals one if firm i's country-level creditor rights index (Djankov et al., 2007; La Porta, Lopez-de-Silanes, Shleifer, & Vishny,
1998) is zero or one, and equals zero if the index is two, three or four. We then repeat our primary analysis after
addingWeakCredRights and its interactions to our main specification. As reported in column (1) of Table 8, using creditor rights
to partition the effect of smoothing on cost of debt is essentially equivalent to partitioning on noise, ie, we recover the apparent
result from column (1) of Table 4 that there is no relationship between smoothing and cost of debt. Column (2) of Table 5 reports
results from a specification that includes smoothing interactions with both creditor rights and private benefits consumption threat.
As reported, our main result obtains, in that there is a dif- ferential relationship between smoothing and cost of debt across private
benefits consumption threat environments, even after controlling for the effect of creditor rights (which remains insignificant).
6.5.2 Other accounting attributes
Extant literature documents a negative relationship between cost of debt and both accruals quality and accounting conservatism
(eg, Bharath et al., 2008; Zhang, 2008). Further, extant literature documents that different accounting
26
In addition to equation-by-equation estimation using different loan terms as dependent variables, we estimate the equations
simultaneously using seem- ingly unrelated regression, and find inferences consistent with our reported results across all loan
terms we consider, includingSpreadand NCov.
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TABLE7 Financial covenants
Column: (1)
DiscSmooth 0.001
(0.44)
DiscSmooth *PBThreat 0.007**
(2.15)
FundSmooth 0.001
(1.13)
LSize 0.045
(1.19)
BTM 0.028
(0.44)
Leverage 0.116
(0.64)
ROA −0.289
(−0.72)
Tangible −0.459***
(−2.97)
StdRet 1.494
(0.99)
Spread −0.000
(−0.59)
LFacility −0.001
(−0.09)
LMaturity −0.046
(−0.74)
Secure 0.001
(0.44)
Included Fixed Effects C, Y
Standard Error Clustering C, P
N 724
Adj. R2 0.358
Table 7 presents results of OLS estimation of a modified version of Equation (4) where NCov(the number of financial covenants
on the loan) is used as the dependent variable:
NCov
i,l
=β
0
+β
1
PBThreat i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
FundSmooth
i,t + β
5
FundSmooth ∗ PBThreat + αX
i,t
+ αY
i,l
+ country + year + ε
i,l Spread is the loan interest rate over LIBOR in basis points.
PBThreat is an indicator that equals one (zero) if a firm is in a coun- try with high (low) threat of private benefits consumption.
DiscSmooth is a rank variable increasing in firm-level discretionary smoothing.FundSmooth is a rank variable increasing in
firm-level fundamental smoothness. All variables are further defined in Appendix A. Country and year fixed effects (including the
intercept and main effect ofPBThreat) are included but not reported. Robust t-statistics based on two-way clustered standard
errors by country and loan package are reported in parentheses. *, **, and *** indicate significance (two-sided) at the 10%, 5%
and 1% levels, respectively.
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TABLE8 Creditor rights
Column: (1) (2)
DiscSmooth −0.052 −0.120**
(−0.50) (−2.01)
DiscSmooth*WeakCredRights 0.055 −0.184
(0.28) (−1.25)
DiscSmooth*PBThreat 0.501***
(2.71)
FundSmooth −0.183 −0.177
(−1.12) (−1.13)
LSize −14.210*** −14.177***
(−6.66) (−6.59)
BTM 22.916*** 22.828***
(4.02) (3.69)
Leverage 46.071*** 42.844***
(4.52) (3.94)
ROA −2.635 −2.557
(−0.05) (−0.05)
Tangible 1.440 2.282
(0.12) (0.20)
StdRet 214.971* 223.200*
(1.90) (1.94)
NCov 4.035 4.294
(1.22) (1.31)
LFacility −10.837*** −10.678***
(−3.07) (−3.05)
LMaturity 70.366*** 70.619***
(3.35) (3.40)
Secure 64.090*** 63.790***
(2.97) (3.00)
DiscSmooth+ DiscSmooth*PBThreat 0.381*
Included Fixed Effects C, YC, Y
Standard Error Clustering C, PC, P
N 1,817 1,817
Adj. R2 0.437 0.439
Table 8 presents results of OLS estimation of an extension of Equation (4) which includes a variable that captures the extent of
country-level creditor rights:
Spread
i,l
=β
0
+β
1
PBThreat i
+β
2
WeakCredRights i
+β
3
DiscSmooth
i,t
+β
4
DiscSmooth ∗ WeakCredRights i + β
5
DiscSmooth ∗ PBThreat + β
6
FundSmooth
i,t
+ αX
i,t
+ αY
i,l
+ country + year + ε
i,l
.
PBThreat is an indicator that equals one (zero) if a firm is in a country with high (low) threat of private benefits consumption.
WeakCredRights is an indicator that equals one if a firm is in a country with weak creditor rights. DiscSmooth (FundSmooth) is a
rank variable increasing in firm-level discretionary (fundamental) smoothness. All variables are further defined in Appendix A.
Country and year fixed effects (including main effects on PBThreat and WeakCredRights) are included, but not reported. Robust
t-statistics based on two-way clustered standard errors by country and loan package are reported in parentheses. *, **, and ***
indicate significance (two-sided) at the 10%, 5% and 1% levels, respectively.
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60 AMIRAM
AND
system characteristics, including accruals quality, conservatism and smoothness, are correlated with one another (eg, Dechow et
al., 2010).
To verify that our results are indeed capturing effects of smoothing and not an alternative (correlated) accounting attribute, we
estimate a modification to Equation (4) where we replace DiscSmooth with a measure of accruals quality (AQ) computed
following the approach of Dechow & Dichev (2002), and estimate a specification that includes both DiscSmooth and AQ and
their interactions with PBThreat.27 As reported in Column (1) of Table 9, we find a negative relationship between AQ and
Spread, consistent with Bharath et al. (2008), and this negative relationship does not vary across private benefits consumption
threat environments (as indicated by the insignificance of AQ*PBThreat). Further, our key inference that DiscSmooth changes
sign in its relationship with Spread across threat environments remains.
We repeat (separately) this modification of Equation(4) with both BTM (as an inverse proxy for conservatism) and the
standard deviation of NIEXS computed over the three-to-five year horizon ending in year t as an inverse proxy for earnings
persistence (Dichev & Tang, 2009). As with AQ, the signs of the relationships between DiscSmooth and these alternative
attributes (conservatism and earnings persistence) do not vary across threat environments. Moreover, our primary inferences
regarding DiscSmooth hold in the presence of these alternative attributes and their interactions with PBThreat. Accordingly, we
conclude that our inferences are indeed attributable to smoothing, and not an alterna- tive correlated accounting attribute.
6.5.3 Measurement error in smoothness proxies
Extant literature presents tests that lend construct validity to the smoothing measure we use in this study (eg, Lang & Maffett,
2011b; Lang et al., 2012). However, we acknowledge that this proxy for smoothing may contain significant measurement error.
Given that measurement error typically introduces attenuation bias in coefficient estimates, any such measurement error would
work against our finding significant relationships between smoothing and cost of debt. A separate but related concern is whether
the relationship between smoothing and cost of debt is driven by correlated omitted variables. In order for omitted variables to be
the driver of our results, it would be necessary for the omitted variables to be negatively associated with smoothing in low
consumption threat environments, but positively associ- ated with smoothing in high consumption threat environments. We view
this as an unlikely explanation for our results.
6.5.4 Smoothing motivations
Although we position our study within the signaling versus garbling framework of smoothing motivations, we recognize that
there exist other smoothing motivations, such as removing risk from earnings-based compensation contracts and tax
minimization. However, it is unlikely that these motivations differ across high and low private benefit consumption threat
environments in a manner that would affect our inferences. Relatedly, smoothing may be accomplished by meth- ods aside from
accounting choice, such as real operational decisions (Fudenberg & Tirole, 1995), hedging via derivative use (Barton, 2001), or
asset sales (Black et al., 1998; Peasnell, 1998). In our framework, smoothing that results from these activities is likely to be
captured by the discretionary smoothing component. We do not attempt to disentangle the sources of smoothing. Because
smoothing via these alternative mechanisms can likewise be used to either signal or garble, the logic of our study applies
regardless of the smoothing mechanism.
6.5.5 Relationship lending
As pointed out in extant literature (eg, Bharath et al., 2008; Sufi, 2007), lenders with prior relationships with bor- rowers are
likely to have both extensive operational information about the borrower and well-developed information channels with firm
insiders. Thus, existing relationships could lead to mitigated effects of smoothing on loan terms. However, as also pointed out in
extant literature (eg, Murfin, 2012; Rajan, 1992), relationships between borrowers and lenders may lead to lender ability to extract
information rents. Following this logic, if smoothing creates opacity as under the garbling view, information rents may increase,
enabling lenders to increase loan spread. Therefore, the
27 Data requirements for computingAQ cause a significant decrease in our sample size, to 976 observations.
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AMIRAM
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TABLE9 Other accounting attributes
Attribute: AQ BTM σNIEXS
Column: (1) (2) (3)
DiscSmooth −0.392*** −0.151*** −0.098#
(−5.90) (−2.69) (−1.57)
DiscSmooth*PBThreat 0.682*** 0.428*** 0.497**
(3.43) (2.62) (2.34)
Attribute −0.319*** 26.690*** 89.564***
(−4.13) (4.10) (2.94)
Attribute*PBThreat 0.350 −10.401 240.724
(1.04) (−0.65) (0.66)
FundSmooth −0.270 −0.177 −0.067
(−1.33) (−1.12) (−0.62)
LSize −6.141* −14.158*** −13.958***
(−1.66) (−6.62) (−6.53)
BTM 19.865*** 24.727***
(2.71) (4.14)
Leverage 65.949*** 46.167*** 47.346***
(2.79) (4.99) (4.64)
ROA −62.748 3.118 2.928
(−0.76) (0.06) (0.06)
Tangible 12.062 1.817 6.513
(1.28) (0.15) (0.59)
StdRet 261.633* 225.563** 224.549**
(1.85) (2.00) (2.01)
NCov 10.374*** 4.245 4.365
(2.88) (1.29) (1.32)
LFacility −10.638*** −10.652*** −10.679***
(−3.04) (−3.02) (−3.15)
LMaturity 23.554 70.479*** 69.971***
(1.61) (3.36) (3.36)
Secure 58.520** 63.518*** 63.490***
(2.14) (2.97 ) (3.04)
DiscSmooth+ DiscSmooth*PBThreat 0.290# 0.277* 0.399*
Included Fixed Effects C, YC, YC, Y
Standard Error Clustering C, PC, PC, P
N 976 1,817 1,817
Adj. R2 0.439 0.439 0.441
Table 9 presents results of OLS estimation of an extension of Equation (4) which includes variables that capture other account-
ing attributes, along with their interactions with PBThreat, where PBThreat is an indicator that equals one (zero) if a firm is in a
country with high (low) threat of private benefits consumption:
Spread
i,l
=β
0
+β
1
PBThreat i
+β
2
DiscSmooth
i,t
+β
3
DiscSmooth ∗ PBThreat + β
4
Attribute
i,t + β
5
Attribute ∗ PBThreat + β
6
FundSmooth
i,t
+ αX
i,t
+ αY
i,l
+ country + year + ε
i,l DiscSmooth(FundSmooth) is a rank variable increasing in firm-level discretionary (fundamental) smoothness.AQ is a proxy
for
(Continues)
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AND
TABLE9 (Continued)
accruals quality. BTM is an inverse proxy for accounting conservatism. σNIEXS is an inverse proxy for earnings persistence. All
variables are further defined in Appendix A. Country and year fixed effects (including the intercept and main effect ofPBThreat)
are included, but not reported. Robustt-statistics based on two-way clustered standard errors by country and loan package are
reported in parentheses. *, **, and *** indicate significance (two-sided) at the 10%, 5% and 1% levels, respectively. # indicates
significance (one-sided) at the 10% level.
effects of relationship banking on the association between smoothing on loan spread is an empirical question. In untab- ulated
analysis, we find no difference in the effect of smoothing on loan spread for relationship versus non-relationship loans. This is
consistent with findings in Costello & Wittenberg-Moerman (2011) who find no difference in the effects of internal control
weaknesses on financial covenant use for relationship versus non-relationship loans.

7 CONCLUSION
Income smoothing by managers is a pervasive phenomenon that has been widely researched. Despite the fact that pri- vate debt
markets provide a major source of financing used by most corporations, we have incomplete evidence on how smoothing is
associated with cost of debt in the private loan market. The institutional factors associated with private loan contracts, combined
with the theoretical motivations for smoothing, make it unclear ex ante whether smoothing will be positively, negatively, or not
associated with loan spread. In this study, we fill this gap in the literature. Extant evidence regarding smoothing in the credit
markets is incomplete, and presents a one-sided inference that income smoothing lowers cost of debt. This state of the literature is
puzzling, given that there are two coexisting views of smoothing that theoretically suggest opposite signs in the association
between smoothing and cost of debt. That is, the information signaling view of smoothing suggests a negative association, and the
information garbling view of smooth- ing suggests a positive association.
Our conjecture is that lenders' view of smoothing is a function of the extent of the threat of managerial private benefits
consumption in the contracting environment. In high (low) threat environments, we predict that lenders are more likely to take the
information garbling (signaling) view of smoothing. Consistent with our predictions, we provide evidence that smoothing is
associated with lower cost of debt when the threat of private benefits consumption by man- agers is low, and is associated with
higher cost of debt when the threat of private benefits consumption by managers is high. In so doing, our study is the first to
document a positive association between smoothing and cost of debt, and we are the first to identify a feature of the contracting
environment that empirically reveals the sign reversal in the association.
We use an international sample of private loans so that we can obtain plausibly exogenous variation in the threat of private
benefits consumption in the contracting environment. Accordingly, our study is subject to the typical small sample concerns that
plague international debt research, which leads to concerns about generalizability of our findings. However, we find consistent
inferences using both country-level and firm-level threat measures in our primary non-US sample, as well as using firm-level
measures in a much larger US-only sample. The consistency in inference using these multiple approaches and samples provides
some comfort with regard to these concerns. In summary, notwithstanding the study's natural limitations, we contribute important
new evidence both to the debt contracting literature and to the literature that examines the effects of income smoothing in
international capital markets.
ACKNOWLEDGEMENTS
The authors thank Peter Pope (Editor), an anonymous referee, Edwige Cheynel, Peter Demerjian, Ilia Dichev, Shane Dikolli, Ron
Dye, Ted Goodman (AAA discussant), Trevor Harris, Alon Kalay, Mark Lang, Yun Lou, Mark Maffett, Nahum Melumad, Grace
Pownall, Gil Sadka, Cliff Smith, Jason Wei, Chris Williams, Regina Wittenberg-Moerman (Colorado conference discussant),
Joanna Wu, Paul Zarowin, Jerry Zimmerman, and workshop participants at the 2011 Inter- national Conference on Credit
Analysis and Risk Management, the 2011 American Accounting Association Annual
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Meeting, the 2011 Columbia University Burton Workshop, 2012 Colorado Summer Accounting Conference, Emory University,
National University of Singapore, Northwestern University, and Temple University for helpful comments and suggestions. We are
grateful to Ryan Ball and Florin Vasvari for providing a matching table between Dealscan and Worldscope. (Paper received July
2017, revised revision accepted October 2017)
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APPENDIX A
Variable definitions
Variables prefixed by DS-, WS- and DL- are the mnemonic identifiers of the raw data items obtained from Datas- tream Advance,
Worldscope, and Dealscan, respectively. Subscripts i, t, and l refer to firm, fiscal year, and loan facility, respectively.
Accruals
,i,t
change in current assets (WS-WC02201) minus change in cash (WS-WC02001) minus change in
current liabilities (WS-WC03101) plus change in short-term debt (WS-WC03051) minus depreciation and amortization
(WS-WC01151)
AccrualsS
,i,t
Accruals
,i,t
scaled by lagged total assets (TA
i,t–1
)
AQ
i,t
'accrual quality', measured as negative one times the standard deviation of firm i's residuals from a
regression more than five of AccrualsS
residuals. ,i,t
on OpCash
i,t–1
, OpCash
i,t
and OpCash
i,t+1
using no fewer than three nor
AvgOpCash
i,t
average operating cash flow (OpCash) over the three-to-five year horizon ending in yeart
AvgSalesGrowth
i,t
average sales growth (SalesGrowth) over the three-to-five years ending in year t
BTM
i,t
book-to-market, measured as total assets (WS-WC02999) minus total liabilities (WS-WC03351),
divided by market value of equity (WS-MV)
CloseHeldShares
i,t
firm-level indicator of the threat of private benefits consumption; an indicator that equals one if
firmi's percentage of closely held shares in yeart is in the top quartile of sample observations (ie, greater than 45.75%), and zero
otherwise
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AND
composite DiscSmooth
i,t
measure of discretionary income smoothing, calculated as the average percentile ranking (by country) ofDiscSmooth1
and DiscSmooth2
DiscSmooth1
i,t
on industry (two-digit WS-ICB) and fiscal year fixed effects and the following variables
for fiscal year t: LSize, Leverage, BTM,StdSales, %Loss, OpCycle, OpLev, AvgSalesGrowthand AvgOpCash
DiscSmooth2
i,t
residual from the panel regression of Smooth1
i,t
on industry (two-digit WS-ICB) and fiscal year fixed effects and the following
variables for fiscal yeart: LSize, Leverage, BTM,StdSales, %Loss, OpCycle, OpLev,AvgSalesGrowth and AvgOpCash
Facility
il
the residual from the panel regression ofSmooth2
i,t
face amount of loan facility l (DL-facilityamt), in millions of US dollars
FundSmooth
i,t
composite measure of fundament al earnings smoothness, calculated as the average percentile
ranking (by country) of FundSmooth1 and FundSmooth2
FundSmooth1
i,t
on industry (two-digit WS-ICB) and fiscal year fixed effects and the following
variables for fiscal yeart: LSize, Leverage, BTM,StdSales, %Loss, OpCycle, OpLev,AvgSalesGrowth and AvgOpCash
FundSmooth2
i,t
predicted value from the panel regression of SMTH1
i,t
on industry (two-digit WS-ICB) and fiscal year fixed effects and the following
variables for fiscal yeart: LSize, Leverage, BTM,StdSales, %Loss, OpCycle, OpLev,AvgSalesGrowth and AvgOpCash
Leverage
i,t
predicted value from the panel regression of SMTH2
i,t
leverage, measured as total liabilities (WS-WC03351) divided by total assets (WS-WC02999)
LFacility
i,l
natural logarithm of Facility
LMaturity
i,l
natural logarithm of Maturity
LSize
i,t
natural log of total assets (WS-WC02999) in US dollars
Maturity
i,l
the term in months of loan facility l (DL-maturity)
MgrEntrench
i,t
firm-level measure of the thre at of private benefits consumption; an indicator that equals one if firm i's Bebchuk et al. (2009)
entrenchment index in year t is greater than three, and zero otherwise.
NCov
i,l
number of distinct financial and net worth covenants attached to the loan facility l's loan package
NIEXS
i,t
)
σNIEXS
i,t
net income before extraordinary items (WS-WC01551) scaled by lagged total assets (TA
i,t–1 standard deviation of NIEXS computed over
the three-to-five year horizon ending in yeart
OpCash
i,t
operating cash flow, measured as net income before extraordinary items (WS-WC01551) minus
Accruals, scaled by lagged total assets (TA
i,t–1
)
OpCycle
i,t
operating cycle, measured as the natural logarithm of ((average accounts receivable/sales)*360 +
(average inventory/cost of goods sold)*360); accounts receivable (WS-WC02051), sales (WS-WC01001), inventory
(WS-WC02101), cost of goods sold (WS-WC01051)
OpLev
i,t
operating leverage, measured as property, plant and equipment (WS-WC02501), divided by total
assets (TA)
PBThreat i
country-level indicator of the threat of private benefits consumption; an indicator that equals one if
the Djankov et al. (2008) anti-self-d ealing index of firm i's country is below the sample observation median, and zero otherwise
%Loss
i,t
percentage of years where net income before extraordinary items (WS-WC01551) is less than zero
over the three-to-five year horizon ending in year t
PD
i,m
firm i's one-year ahead probability of default as of month m, obtained from the Credit Risk Institute of the National University of
Singapore (NUS CRI). The default probabilities are estimates using a forward intensity model, as outlined in Duan et al. (2012).
ROA
i,t
earnings before interest and taxes divided by total assets (WS-WC02999)
Secure
i,l
an indicator variable that equals one if loan facility l requires collateral, and zero otherwise
(DL-secured)
SalesGrowth
i,t
sales growth, measured as percentage change in sales (WS-WC01001) from yeart–1 to t
Smooth1
i,t
(standard deviation of NIEXS divided by the standard deviation of OpCash) multiplied by –1, where
the standard deviations are computed over the three-to-five year horizon ending in year t
Smooth2
i,t
correlation between OpCashand AccrualsS multiplied by –1, where the correlation is computed over
the three-to-five year horizon ending in year t
Spread
i,l
interest rate on loan facilityl in excess of LIBOR, in basis points (DL-allindrawn)
OWENS
AMIRAM
AND
StdRet
i,l
standard deviation of monthly return (computed from DS-ret_index) for firmi over the 12-month
horizon immediately preceding loan facility l
StdSales
i,t
standard deviation of sales (WS-WC01001) over the three-to-f ive year horizon ending in year t
TA
i,t
total assets (WS-WC02999)
Tangible
i,t
asset tangibility, measured as property, plant and equipment (WS-WC02501), scaled by total assets,
TA
WeakCredRights i
country-level measure of creditor rights given default, based on the country-level creditor rights
index developed in La Porta et al. (1998) and Djankov et al. (2007), which ranges from 0 to 4; our variable is an indicator that
equals one if firm i's country-level creditor rights index is 0 or 1, and zero otherwise.
APPENDIX B
Stylized framework that illustrates our key predictions
In this Appendix we describe a partial equilibrium framework that provides one example of how the forces we describe in this
paper interact to yield our predictions under a set of plausible assumptions.28 We are not attempting to create a complete
analytical model of a private lending interaction. For example, the framework does not include features such as private
information flows, financial covenants, etc. Rather, we use this framework to simply demonstrate key forces that can plausibly
lead to our predictions concerning the sign reversal in the association between smoothing and loan spread. As discussed in the
paper, these institutional features of the private debt setting provide some tension concerning our predicted associations.
Setup
Consider an existing all-equity firm with a self-interested manager/owner, ie, the manager has an incentive to maxi- mize her own
utility, where the firm has no minority shareholders (although this framework can easily generalize to a case where there are
minority shareholders). At time t = 0, the manager knows that at time t = 1, the firm will require additional financing in the
amount $K to fund a project, which we assume will be obtained in the form of debt with interest rate I.29 At time t = 2, the
project outcome is realized, with probability of failure (success) PD (1 − PD). If suc- cessful, the project has a gross percentage
return R greater than the risk-free rate (which we normalize to zero for convenience), the lender is repaid, and the firm continues.
If the project fails, the firm defaults and the lender receives gross recovery rate V as a percentage of K.
At time t = 0, nature endows the manager with two key things that are unobservable to external capital suppli- ers. First, with
probability Pα ∈ (0,1) the manager receives private information that the firm's economic earnings are less volatile than reported
cash flows suggest (thus, setting up the possibility that the manager can signal using income smoothing, assuming she has the
ability to smooth). Without loss of generality, we characterize firms in binary fashion as either having smooth economic earnings
(denoted as α
1
) or not (denoted as α
0
). Further, we assume that smooth
economic earnings lowers probability of default, ie, 0 < PD
α1
< PD
α0
< 1 (Merton, 1974). Second, with prob- ability Pλ ∈
(0, 1) nature endows the manager with the ability to smooth reported income.30 This ability could relate to either managerial
skill, or innate smoothness of underlying cash flows (ie, if cash flows are innately smooth, there will
28 For example, an alternative framework could consider a relationship between minority and controlling shareholders, where
smoothing is done for the same reasons that are described below. The lending decision could then come later, and exogenously to
the smoothing decision by the borrower (ie, the lender observes smoothing that is the result of the interactions between
controlling shareholders and minority shareholders and responds to the observed smoothing). The predictions of this alternative
framework regarding the sign reversal in the relationship between smoothing and cost of debt will be identical to those we present
below.
29 Debt can be the optimal financing source for a variety of reasons, eg, tax benefits.
30
Under certain values of other parameters that can be characterized, the introduction of this 'ability' parameter is not necessary.
However, it makes the intuition of the framework easier to follow.
OWENS 67
68 AMIRAM
AND
naturally be very little a manager can do to further smooth earnings by applying discretion). Without loss of general- ity, we
simply characterize managers in binary fashion as either able to smooth (denoted as λ
1
) or unable to smooth (denoted as λ
0
) (eg, Trueman & Titman, 1988).31 Accordingly, there are four types of managers across these two unobservable
dimensions, which we denote as follows: θ
αλ
= {α
1
λ
1
;α
1
λ
0
;α
0
λ
1
;α
0
λ
0
}. For example, type θ
αλ
=α
1
λ
0 refers to a
manager that knows economic earnings are relatively smooth, but is unable to smooth reported income to signal that information.
At a time between t = 0 and t = 1 (for simplicity we will call it t = 0.5), the manager chooses whether or not to consume private
benefits, and whether or not to smooth earnings, and then externally reports financial results (ie, earnings, cash flows and
accruals). These choices are made with the understanding that she will pursue a loan at t = 1, and that lenders will price protect
against any anticipated private benefits consumption that extracts firm value. With- out loss of generality, we assume if private
benefits are consumed, they are consumed as a percentage of firm value that translates into a percentage B ∈ (0, 1) of the loan K
(ie, $B ⋅ K). Further, assume that the choice to smooth earn- ings can provide the manager with private benefits that do not
extract firm wealth from external capital providers and are therefore not price protected, for example, power, respect, credibility
and connections (eg, Aghion & Bolton, 1992; Demsetz & Lehn, 1985).32 That is, importantly, these additional benefits will leave
an incentive to smooth even if capital providers fully price protect against the anticipated private benefits which the manager
consumes to their potential detriment. We denote these additional benefits as φ, and for simplicity hereafter will refer to them
simply as 'non-value-extractive' private benefits.
For notational convenience we denote the choice to consume private benefits as B
1
and the choice to not consume private benefits
as B
0
. We characterize the firm's environment as having either low threat (LT) or high threat (HT) of private
benefits consumption (which is observable to capital providers), where low (high) threat of consumption is an environment where
there are heavy (light) penalties if 'caught' (we denote the probability of being caught as PC). We capture this threat with a
punishment parameter γ ∈ {γ
LT
,γ
HT
} that reflects the cost to the manager of being caught, which without
loss of generality we express as a percentage of the amount consumed, where 1 < γ
HT
<γ
LT
< ∞. That is, the expected
cost to the manager of consuming private benefits is $(γ ⋅ B ⋅ K ⋅ PC). We assume that the minimum punishment if caught is
repayment of the amount consumed plus a slap on the wrist, ie, γ
HT
= 1 + ε, where ε → 0. Heavier
penalties that characterize low threat environments include more substantial fines, reputational costs, crimi- nal penalties, etc.
Although we could characterize the point above which the punishment is 'high enough', for simplicity we assume that if the
manager gets caught consuming private benefits in a low threat environment, γ
LT
→ ∞. If the manager has the
ability to smooth income (ie, typeλ
1
), the manager chooses to smooth income (S =1, denoted S
1
) or not (S = 0, denoted S
0
) at time t = 0.5. This choice is made with the manager's understanding that there is a pos- itive
probability at t = 2 that both α and λ will be revealed, and that there will be an associated cost of lying (L > 0) if the manager had
the ability to smooth (λ
1
) but lied about her true type α (ie, α
1
andS
0
, or α
0
andS
1
) (Desai et al., 2006). Consistent
with our characterization of costs of private benefits consumption, we assume that L
HT
<L
LT
.33 Although we could
characterize the point below (above) which the cost is low (high) enough, for simplicity we set L
HT
= ε → 0 (L
LT
→ ∞). We assume that if the manager chooses to consume private benefits, income smoothing reduces the prob- ability of
being caught (Fudenberg & Tirole, 1995). Further, for simplicity we assume that if the manager consumes private benefits but
does not smooth, she will be caught. That is, 0 < PC
S1
< PC
S0
= 1. After the manager chooses B and S at t = 0.5,
she reports financials.
31 Alternatively, we could assume differences in smoothing ability across a continuum, or differences in manager-specific costs of
smoothing.
32
Alternatively, smoothing can provide managers with other pecuniary benefits that are not price protected by external capital
providers, for example, smoothing can lower the firm's total tax obligations, which increases the size of the pie for the manager
and capital suppliers (eg, Graham & Smith, 1999; Hepworth, 1953).
33 Alternatively, to reduce the number of parameters we could have used the punishment parameter to describe the misreporting
costs.
OWENS
AMIRAM
AND
The manager's choice of private benefits consumption and smoothing
Based on our binary exposition, there are four BS choice combinations, which we denote θ
BS
= {B
0
S
1
;B
0
S
0
;B
1
S
1
;B
1
S
0
}. For example, type θ
BS
=B
0
S
1
refers to a manager that smooths income and does not consume
value-extractive private benefits. At time t = 0.5, the manager chooses θ
BS
to maximize her payoff, subject to her endowed
(unobservable) type θ
αλ
}. Table A1 outlines the payoff
structures to the manager under each scenario. Note that the manager's general payoff equals the sum of five terms:
(1 − PD) ⋅ K ⋅ (R − I)+(PD ⋅ B ⋅ K)−(γ ⋅ B ⋅ K ⋅ PC) − L + φ. (A1)
The first term, (1 − PD) ⋅ K ⋅ (R − I), is the expected payoff if the project succeeds. The second term, (PD ⋅ B ⋅ K), is the
expected payoff if the project fails (ie, the manager receives the amount of private benefits consumed). The third term, (γ ⋅ B ⋅ K
⋅ PC), is the expected cost of consuming private benefits. The fourth term, L, is the expected cost of lying about whether the
manager has smooth economic earnings (eg, Desai et al., 2006). The fifth term, φ, is the additional non-value-extractive private
benefits obtained from smoothing.
Consider a manager operating in a high threat of consumption environment, as depicted in Panel A of Table A1. For
endowment θ
αλ
= {α
1
λ
1
;α
1
λ
0
;α
0
λ
1
;α
0
λ
0
} and (observable) γ ∈ {γ
LT
,γ
HT
=α
1
λ
1
, choice 2 dominates choice 4 (because the sum of terms two and three is zero in choice 2 and negative in
choice 4), choice 3 dominates choice 1 (because the sum of terms two and three is positive in choice 3 and zero in choice 1). The
determination of whether choice 2 or 3 is optimal depends on the net benefit of private benefits consumption (the sum of terms
two, three and five in choice 3) relative to the interest rate differential reflected in the first term in both choices. It is
straightforward to show (as outlined below) that in setting interest rates, the lender will fully price protect against anticipated
private benefits consumption, and the borrower will be indifferent between choices 2 and 3 before considering additional
non-value-extractive private benefits, φ. Therefore, it follows directly that for any positive φ, the borrower will choose to smooth
and consume, even in the face of full lender price protection against private benefits consumption. Specifically, setting the
borrower's choice 2 and 3 payoff functions equal, the borrower will choose choice 3 (smooth and consume) if I
S1
PD⋅B 1−PD
 φ 1−PD
. As we show in the section below, based on full lender
price protection, I
S1
−I
S0
<
+−I
S0
=
PD⋅B 1−PD
. Thus, the borrower will find choice 3 optimal for any positive φ. Continuing across the
other endowment possibilities, it follows that the optimal choice for θ
αλ
=α
0
=α
1
λ
0
is 2, for θ
αλ λ
1
is 2 or 3, and for θ
αλ
=α
0
λ
0
is 2. As depicted in Panel B, following the same approach in analyzing the manager's choice in
the low consumption threat environment, the optimal choice for θ
αλ
λ
1 is 2, and for θ
αλ
=α
1
λ
1
is 1,θ
αλ
=α
1
λ
0
is 2, for θ
αλ
=α
0=α
0
λ
0
is 2. This structure is understood by the lender, who will use these insights when choosing the interest rate
I.
The lender's pricing decision
At time t =1, the lender chooses the interest rate I on the loan amount $K. Theoretically,I will be increasing in expected cost of
default, ie, (probability of default)*(loss given default). Literature has established that smoother economic earnings imply lower
probability of default (eg, Merton, 1974). That is, PD
α1
. Further, it is straightforward that managerial
consumption of private benefits from capital providers increases loss given default, ie, decreases the recovery rate in the event of
default (V = RB). That is, V
B1
< PD
α0
. Accordingly, the lender would like to base I on the
smoothness of economic earnings and the extent of managerial private benefit consumption, but neither fac- tor is directly
observable at the contracting date. Therefore, the lender will base I on the observable private ben- efits consumption threat (γ) and
the smoothness of earnings (S), where smooth earnings may reflect either signal- ing or garbling. Based on our binary
characterizations, there are four possible interest rates, which we denote as I
γS
<V
B0
= {I
γ
HT
S0
;I
γ
HT
S1
;I
γ
LT
S0
;I
γ
LT
S1
}. Consider the high consumption threat environment. It follows from the analysis outlined in Panel A
of Table A1 that if the manager smooths income (S
1
), the lender knows that the manager consumed private
OWENS 69
70 AMIRAM
AND
TABLE A1 Framework-based predictions of managerial private benefits consumption and smoothing choice
Panel A: Payoffs to manager in high threat of private benefits consumption
γ
HT
= 1 + ε; L
HT
= ε; PC
S1
= ε;PC
S0
=1
Endowment: θ
αλ
=α
1
λ
1
(has smooth economic earnings and can smooth reported income)
Choice 1:θ
BS
=B
0
S
1
(1 − PD) ⋅ K ⋅ (R − I
HT,S1
)+0−0−0+φ
Choice 2:θ
BS
=B
0
S
0
* (1 − PD) ⋅ K ⋅ (R − I
HT,S0
)+0−0−ε
Choice 3:θ
BS
=B
1
S
1
* (1 − PD) ⋅ K ⋅ (R − I
HT,S1
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ ε − 0 + φ
Choice 4:θ
BS
=B
1
S
0
(1 − PD) ⋅ K ⋅ (R − I
HT,S0
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ 1 − ε
Endowment: θ
αλ
=α
1
λ
0
(has smooth economic earnings but cannot smooth reported income)
Choice 1:θ
BS
=B
0
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 2:θ
BS
=B
0
S
0
* (1 − PD) ⋅ K ⋅ (R − I
HT,S0
)+0−0−0
Choice 3:θ
BS
=B
1
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 4:θ
BS
=B
1
S
0
(1 − PD) ⋅ K ⋅ (R − I
HT,S0
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ 1 − 0
Endowment: θ
αλ
=α
0
λ
1
(does not have smooth econom ic earnings but can smooth reported income)
Choice 1:θ
BS
=B
0
S
1
(1 − PD) ⋅ K ⋅ (R − I
HT,S1
)+0−0−ε+φ
Choice 2:θ
BS
=B
0
S
0
* (1 − PD) ⋅ K ⋅ (R − I
HT,S0
)+0−0−0
Choice 3:θ
BS
=B
1
S
1
* (1 − PD) ⋅ K ⋅ (R − I
HT,S1
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ ε − ε + φ
Choice 4:θ
BS
=B
1
S
0
(1 − PD) ⋅ K ⋅ (R − I
HT,S0
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ 1 − 0
Endowment: θ
αλ
=α
0
λ
0
(does not have smooth economic earnings and cannot smooth reported income)
Choice 1:θ
BS
=B
0
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 2:θ
BS
=B
0
S
0
* (1 − PD) ⋅ K ⋅ (R − I
HT,S0
)+0−0−0
Choice 3:θ
BS
=B
1
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 4:θ
BS
=B
1
S
0
(1 − PD) ⋅ K ⋅ (R − I
HT,S0
) + PD ⋅ B ⋅ K − (1 + ε) ⋅ B ⋅ K ⋅ 1 − 0
Panel B: Payoffs to manager in low threat of private benefits consumption
γ
LT
= ∞;L
LT
= ∞; PC
S1
= ε;PC
S0
=1
Endowment: θ
αλ
=α
1
λ
1
(has smooth economic earnings and can smooth reported income)
Choice 1:θ
BS
=B
0
S
1
* (1 − PD
α1
) ⋅ K ⋅ (R − I
LT,S1
)+0−0−0+φ
Choice 2:θ
BS
=B
0
S
0
(1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
)+0−0−∞
Choice 3:θ
BS
=B
1
S
1
(1 − PD
α1
) ⋅ K ⋅ (R − I
LT,S1
) + PD
α1
⋅B⋅K−∞⋅B⋅K⋅ε−0+φ
Choice 4:θ
BS
=B
1
S
0
(1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
) + PD
α1
⋅B⋅K−∞⋅B⋅K⋅1−∞
Endowment: θ
αλ
=α
1
λ
0
(has smooth economic earnings but cannot smooth reported income)
Choice 1:θ
BS
=B
0
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 2:θ
BS
=B
0
S
0
* (1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
)+0−0−0
Choice 3:θ
BS
=B
1
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 4:θ
BS
=B
1
S
0
(1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
) + PD
α1
⋅B⋅K−∞⋅B⋅K⋅1−0
Endowment: θ
αλ
=α
0
λ
1
( does not have smooth economic earnings but can smooth reported income)
Choice 1:θ
BS
=B
0
S
1
(1 − PD
α1
) ⋅ K ⋅ (R − I
LT,S1
) + 0 − 0 −∞+ φ
Choice 2:θ
BS
=B
0
S
0
* (1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
)+0−0−0
Choice 3:θ
BS
=B
1
S
1
(1 − PD
α1
) ⋅ K ⋅ (R − I
LT,S1
) + PD
α1
⋅ B ⋅ K − ∞ ⋅ B ⋅ K ⋅ ε −∞+ φ
Choice 4:θ
BS
=B
1
S
0
(1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
) + PD
α0
⋅B⋅K−∞⋅B⋅K⋅1−0
Endowment: θ
αλ
=α
0
λ
0
(does not have smooth economic earnings and cannot smooth reported income)
Choice 1:θ
BS
=B
0
S
1
N/A (cannot have S
1
for type λ
0
)
Choice 2:θ
BS
=B
0
S
0
* (1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
)+0−0−0
(Continues)
OWENS
AMIRAM
AND
TABLE A1 (Continued)
Panel B: Payoffs to manager in low threat of private benefits consumption
Choice 3:θ
BS
)
Choice 4:θ
BS
=B
1
S
1
N/A (cannot have S
1=B
1
S
0
(1 − PD
α0
) ⋅ K ⋅ (R − I
LT,S0
) + PD
α0
⋅B⋅K−∞⋅B⋅K⋅1−0
This table outlines payoffs to a manager who chooses whether to consume private benefits and smooth reported income prior to
obtaining a loan to undertake a project.B
0
(B
1
) denotes her choice to not consume (consume) private benefits.S
0
(S
1
) denotes her choice to
not smooth (smooth) reported income. α
0
(α
1
) denotes her endowment of private information that economic earnings are
not smooth (smooth).λ
0
(λ
1
) denotes her endowment of the inability (ability) to smooth reported income. The gen- eral
structure of her payoff is(1 − PD) ⋅ K ⋅ (R − I)+(PD ⋅ B ⋅ K)−(γ ⋅ B ⋅ K ⋅ PC) − L + φ.PDis the probability of project default. K
is the dollar amount borrowed. R is the project's gross percentage return. I is the interest rate charged by the lender. B is the
amount of private benefits she consumes. γ is the punishment parameter for consuming private benefits. PC is the probability of
getting caught consuming private benefits. L is the cost of lying about her type α. φ is an additional smoothing benefit that
accrues to the firm. * denotes non-dominated strategies under each possible threat/endowment combination. General structure of
manager's payoff: (1 − PD) ⋅ K ⋅ (R − I)+(PD ⋅ B ⋅ K)−(γ ⋅ B ⋅ K ⋅ PC) − L + φ.
benefits.34 Further, if the manager does not smooth income (S
0
), the lender knows the manager did not consume pri- vate benefits.
In either case (S
1
or S
0
), the lender will assess that the firm has smooth economic earnings (α
1
) with probability Pα
and that the firm does not have smooth economic earnings (α
0
) with probability (1 − Pα). It is straight- forward to
then show that I
γ
HT
,S1
>I
γ
HT
,S0
because V
B1
<V
B0
. Our prediction that smoothing is positively associated with loan
spread in countries with high threat of private benefits consumption follows immediately. More formally, we can solve for the
interest rate differential I
γ
HT
−I
γ
HT
. Consider again endowment θ
αλ
=α
1
λ
1
. The lender will set rates to
equalize expected profit across choices 2 and 3, where the general form of the lender's profit equals (1 − PD) ⋅ K ⋅ (1 + I) + PD ⋅
K ⋅ (R − B) − K. Setting this lender profit function equal across choice 2 and 3, it is straight- forward to show that I
γ
HT
,S1
,S0
,S1
−I
γ
HT
,S0
=
PD⋅B 1−PD
> 0. Next, consider the low consumption threat environment. It follows from the analysis
outlined in Panel B of Table A1 that the manager will never consume private benefits. If the manager smooths income (S
1
), the lender knows the firm has smooth
economic earnings (α
1
) with probability 1.0. If the manager does not smooth income (S
0
), the lender does not know
whether the firm has smooth economic earnings or not, and assesses the probability of smooth eco- nomic earnings at less than
1.0. It is then straightforward to show that I
γ
LT
,S1
<I
γ
LT
,S0
, because PD
α1
< PD
α0
. Our prediction that
smoothing is negatively associated with loan spread in countries with low threat of private benefits consumption follows
immediately. More formally, in the low threat environment, setting the lender's profit function equal across borrower smoothing
choices yields the following expression: (1 − PD
α1
) ⋅ K ⋅ (1 + I
S1
) + PD
α1
(K ⋅ R) − K = (1 − PD
α0 PD
α1
) ⋅ K ⋅ (1 + I
S0
) + PD
α0
(K ⋅ R) − K. After algebraic simplification:I
S1 < PD
α0
, the term on the right-hand side is negative, and the ratio multiplier − I
S0
⋅ attached ( 1−PD 1−PD
α0 α1
)=
(1−R)(PD
to I
S0
on 1−PD
the α1 α1 −PD
 left-hand α0 )
. Because side is less than one. Therefore, if I
S1
−I
S0
⋅(
1−PD 1−PD
α0 α1
) < 0, it must be the case that I
S1
−I
S0
< 0, thus I
S1
<I
S0
.
34
We make an implicit assumption that lenders will have the expectation that if managers consumed private benefits before loan
initiation, they will continue to do so after receiving the loan at t= 1.
OWENS 71
for type λ
0