Accounting Information in Private Markets: Evidence from Private Lending Agreements.

Abstract ABSTRACT: This paper contains evidence of accounting measurement rules that are negotiated in private corporate lending agreements. The negotiated sets of rules differ from the regulated set of accounting rules (generally accepted accounting principles). Moreover, the differences between regulated and negotiated rules are systematic and consistent with the economic incentives of borrowers and lenders. Private parties in the market for accounting information are able to produce for themselves at least some of the information required for monitoring lending agreements. The evidence and analysis have implications for: 1. The voluntary choice of accounting rules, 2. The superiority of alternative accounting rules, and 3. The demand for a diverse set of accounting rules.