The Associations Between Book-Tax Differences and Bank Loan Contracting
Wei-Ren Yao/Department of Accounting, National Dong Hwa University
Chen Lung Chin/Department of Accounting, National Chengchi University
Chao Lan Wang/Department of Accounting, National Dong Hwa University
Abstract
Existing literature suggests that the quality of a firm’s financial reporting is related to the design of loan contracts. The objective of this paper is to examine whether and how a borrower’s accounting quality, as proxied by book-tax differences (hereafter BTD), affects the design of loan contracts, such as loan interest rates, the number of financial covenants, and the provision of collateral. Based on a sample of syndicated loan contracts issued by Taiwan listed firms during years 2000 to 2010, this study finds that BTD levels are associated with the design of loan contracts. Specifically, when the extent of a borrower’s BTD increases, bank loan interest rates increase significantly; banks are less likely to use accounting-based financial covenants in loan contracts; and banks are more likely to require collateral. Further, after disaggregating BTD into permanent and temporary subcomponents, we find that the effect of the permanent differences on loan contracts is greater than that of the temporary differences. We find that banks may take into consideration the information contained in the borrowers’ BTD when designing loan contract terms. In addition, the differential loan terms due to the BTD is driven mainly by permanent difference.
Keywords
Book-Tax differencesLoan contractFinancial covenantsTaxable income
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