Sharon Katz

The Changing Relevance of Accounting Numbers to Debt Holders over Time

Coauthor(s): Dan Givoly, Carla Hayn.

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Abstract:
We examine the change over time in the information content of accounting numbers from the perspective of bond holders and the causes for that change. Using proprietary longitudinal data, we find that, in contrast to the stagnant information content of accounting numbers to equity holders, that content to bond holders has been steadily rising over time. The increase is attributable to economic factors such as an increase in risk and in the frequency of unfavorable news to which the valuation of debt is more sensitive than that of equity, as well as to the increase in conservatism over the last four decades. The findings contribute to the scant literature on the use of financial information by bond holders and the extent to which financial reporting meets their unique information needs. Given debt holders are an important constituent of financial statements, the findings have implications for accounting standard setting.

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