審計委員會專家對債務條款之影響 - 政大學術集成

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(1)國立政治大學會計學系研究所碩士學位論文. 審計委員會專家對債務條款之影響政治大立 Expertise and Loan Terms Audit Committee. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. 指導教授：金成隆博士研究生：呂璨宇撰中華民國一○四年五月.

(2) 謝辭兩年研究所時光一下就過了，在畢業前留下了一點努力過的痕跡，能夠順利完成論文，最要感謝的是我的指導教授金成隆老師以及佩怡學姐，在寫論文期間給予了很多的指導以及協助，甚至到最後的口試也有賴學姐的幫忙，非常感謝！也謝謝我的好同門孟璇一路相伴和幫忙，一起崩潰一起手動整理資料，讓寫論文的路上不孤單，也謝謝這一路上好友們的關懷，建安、鹿鹿和銘珈，有你們真好。最後，要感謝我的爸爸媽媽這一路上給予無條件的支持，讓我專心做好每. 政治大. 一件事，也要感謝志勳在論文期間給予很多意見，雖然領域不同，但你一直是. 立. 走在前面帶著我不斷成長的人。感謝大家，學業在此告一段落，我要往下一個. ‧. ‧ 國. 學. io. sit. y. Nat. n. al. er. 階段挑戰了。. Ch. engchi. ii. i Un. v.

(3) Abstract The extant literature reveals that audit committee (AC) members with financial or accounting expertise can enhance the effectiveness of AC in monitoring the financial reporting quality. In this study, I focus on the effects of financial and accounting experts on the effectiveness of AC from bondholders’ point of view, respectively. First, I find no evidence that the presence of financial experts on AC, either alone or jointly with accounting experts, are significantly related to loan terms. Second, I find that. 政治大 require convertible bonds issuance 立 or require collateral to firms whose AC have at least. bondholders charge lower interest rate, offer longer maturity, and are less likely to. ‧ 國. 學. one accounting expert or only accounting experts. Third, I further find that the association between AC experts and loan terms is driven more by accounting experts. ‧. than by financial experts. Given the prior results of a negative relationship between. Nat. sit. y. accounting experts and loan terms, firms could enhance their financial reporting quality. al. n. terms.. er. io. by appropriately structuring AC with accounting experts, thereby rewarding better loan. Ch. engchi. i Un. v. Key words: Audit committee; Financial expert; Accounting expert; Loan term.. i.

(4) Table of Contents Abstract .......................................................................................................................... i 1.. INTRODUCTION ................................................................................................ 1. 2.. LITERATURE REVIEW & HYPOTHESES DEVELOPMENT .................... 6 2.1 Institutional Background ................................................................................................. 6 2.2 Audit Committee Expertise ............................................................................................. 7 2.3 Financial Reporting Quality and Loan Terms ................................................................. 8 2.4 Corporate Governance and Loan Terms.......................................................................... 9 2.5 Hypothesis Development ............................................................................................... 10. 3.. 政治大. RESEARCH DESIGN ........................................................................................ 13. 立. 3.1 Sample and Data Sources .............................................................................................. 13. ‧ 國. 學. 3.2 Variable Choice ............................................................................................................. 13. ‧. 3.2.1 Dependent Variables Measurement ........................................................................ 13 3.2.2 Test Variables Measurement .................................................................................. 14. y. Nat. sit. 3.2.3 Control Variables Measurement ............................................................................. 15. n. al. er. io. 3.3 Empirical Model ............................................................................................................ 20. i Un. v. 3.3.1 The Impact of AC Experts on Bond Rate ............................................................... 21. Ch. engchi. 3.3.2 The Impact of AC Experts on Bond Maturity ........................................................ 23 3.3.3 The Impact of AC Experts on Convertible Bonds Issuance ................................... 24 3.3.4 The Impact of AC Experts on Collateral Requirement .......................................... 26. 4.. EMPIRICAL RESULTS .................................................................................... 28 4.1 Descriptive Statistic ....................................................................................................... 28 4.2 Pearson Correlations...................................................................................................... 29 4.3 Regression Results ........................................................................................................ 30 4.3.1 The Impact of AC Experts on Bond Rate ............................................................... 30. ii.

(5) 4.3.2 The Impact of AC Experts on Bond Maturity ........................................................ 31 4.3.3 The Impact of AC Experts on Convertible Bonds Issuance ................................... 33 4.3.4 The Impact of AC Experts on Collateral Requirement .......................................... 35. 5.. CONCLUSIONS ................................................................................................. 38. REFERENCES ............................................................................................................ 39 Appendix A – Variable Definitions .............................................................................. 44. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iii. i Un. v.

(6) List of Tables Table 1 Sample and Data Source ................................................................................. 46 Table 2 Descriptive Statistics (N=93) .......................................................................... 47 Table 3 Pearson Correlations ....................................................................................... 48 Table 4 The Impact of AC Experts on Bond Rate........................................................ 50 Table 5 The Impact of AC Experts on Bond Maturity ................................................. 51 Table 6 The Impact of AC Experts on Convertible Bonds Issuance ............................ 52 Table 7 The Impact of AC Experts on Collateral Requirement ................................... 53. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iv. i Un. v.

(7) 1. INTRODUCTION During the financial reporting process, the audit committee (AC) plays an important role and has a significant impact on accounting quality by overseeing the effectiveness of financial reporting policies (Klein, 2002; Felo, Krishnamurthy, and Solieri, 2003; Bédard, Chtourou, and Courteau, 2004; DeZoort, Hermanson, and Houston, 2008). The United States Congress passed the Sarbanes-Oxley Act of 2002 to restore investors’ confidence in capital market after several corporate scandals for fraudulent accounting activities. In addition, the Blue Ribbon Committee (1999). 政治大. proposed that at least one AC member should possess expertise in accounting or finance.. 立. In 2003, the Securities and Exchange Commission (SEC) adopted the recommendations. ‧ 國. 學. of the Blue Ribbon Committee and further released Section 407 of SOX- Disclosure of. ‧. Audit Committee Financial Expert in order to achieve high financial reporting quality. In Taiwan, based on Corporate Governance Best Practice Principles for Taiwan Stock. y. Nat. er. io. sit. Exchange (TWSE)/ GreTai Securities Market (GTSM) Listed Companies (2006), AC should be composed of the entire number of independent directors and more than three. n. al. Ch. i Un. v. persons, at least one of whom should have financial expertise. In addition, the. engchi. responsibilities of AC contain (i) monitor the handling procedures for financial or operational actions, (ii) oversee adoptions or amendments of internal control system, and (iii) provide recommendations on the hiring, discharge or compensation of an external auditor. In sum, the policymaker views AC as an important monitoring mechanism in corporate internal control in order to achieve high-quality financial reporting.. 1.

(8) Recent research on mechanism for ensuring high financial reporting quality has largely focused on the structure of ACs. First, Krishnan (2005) finds that the independent ACs and ACs with financial expertise are significantly less likely to be associated with the incidence of internal control problems. Second, Badolato, Donelson, and Ege (2014) conclude that ACs with financial expertise are more effective in deterring earnings management. Moreover, Cohen, Krishnamoorthy, and Wright (2004) indicate that various characteristics of AC influence its effectiveness as corporate governance mechanisms. As a result, the percentage of AC members with expertise in accounting or financial is positively related to financial reporting quality (Felo et al., 2003).. 立. 政治大. ‧ 國. 學. Prior studies largely focus on whether the competence of AC has a significant impact on the financial reporting quality (Klein, 2002; Felo et al., 2003; Bédard et al.,. ‧. 2004; DeZoort et al, 2008). However, since the financial statements can be viewed as a. sit. y. Nat. basis to evaluate a firm’s credit risk, it is expected that AC experts could influence on. n. al. er. io. credit risk. In this study, I focus on the public debt market to examine this impact on. v. credit risk for several reasons. First, public debt securities represent the typical. Ch. engchi. i Un. corporation’s value that is closer to its real essence since bond pricing is relatively well defined, while pricing of equity might be affected by the misspecification of the equilibrium pricing model (Mansi, Maxwell, and Miller, 2004). Second, prior studies suggest that there is a strong association between audit and debt (Blackwell, Noland and Winters, 1998; Pittman and Fortin, 2004). For revolving bank loans of privately held companies, firms who purchase audits pay lower rates than those that do not (Blackwell et al., 1998). To examine how auditor choice affects debt financing, Pittman and Fortin (2004) find that the use of high-quality auditor lowers a firm’s interest cost. 2.

(9) Third, in Taiwan, public companies rely largely on debt to corporate finance. From 2009 to 2013, the average liability ratio of public companies is 42.22% in 5 years. In addition, the average debt-to-equity ratio of public companies is 51.33% in 5 years from 2009 to 2013. Finally, managers tend to maximize shareholder wealth by minimizing the cost of financing (Modigliani and Miller, 1958; 1963). Taken together, the statistical evidence implies that the cost of debt would be a key concern for many companies. The financial statements can be used as a basis for investors and stakeholders to evaluate the corporation’s value and to make an investing decision. And also, it’s the. 政治大 assurance and attestation services to financial reports. Actually, the poor accounting 立 most objective and reliable way because independent external auditors would provide. ‧ 國. 學. quality reflects limited information about the borrowers’ future operations and this asymmetric information is priced by the bank (Bharath and Shumway, 2004). It can be. ‧. seen that the higher accounting quality can contribute to the lower credit risk. The. sit. y. Nat. creditors view ACs and their characteristics as important elements in the financial. n. al. er. io. reporting process (Anderson, Mansi, and Reeb, 2004). In the same vein, Felo et al.. v. (2003) find the evidence that there is a positive relationship between the popularity of. Ch. engchi. AC financial expert and financial reporting quality.. i Un. Based on the aforementioned, we can conclude that the presence of financial expert on AC is positively associated with financial reporting quality, and then reducing the information asymmetric between the users of financial statement. However, Anderson et al. (2004) indicate that financial experts on AC have an insignificant association with the debt cost. But, more recently, more and more studies all indicated that accounting experts are the most effective financial experts in enhancing AC’s monitoring role (Carcello, Hollingsworth, Klein, and Neal, 2006; Qin 2007; Krishnan 3.

(10) and Visvanathan 2008). In other words, the positive effects of AC expert are mainly driven by the presence of accounting expertise, but not financial expertise. However, the effectiveness of AC expert on bond market remains uncertain. The main question to be addressed in this study is to examine whether the presence of the financial expert or accounting expert on AC has a significant impact on the loan term. This study mainly focus on the relationship between accounting expert and loan terms, and the main interest is to examine whether loan terms with accounting experts alone are better than those with financial experts alone. The loan term adopted in this. 政治大 and whether collateral is required, respectively. It is expected that AC with accounting 立. study is proxied by bond rate, bond maturity, whether bond is convertible into stocks,. ‧ 國. 學. experts could significantly and positively influence on loan terms in terms of lower bond rate, longer maturity, nonconvertible bond issuance, and no collateral requirement.. ‧. Moreover, the impact of accounting experts alone may be greater than the impact of. sit. y. Nat. financial experts alone on loan terms.. n. al. er. io. I examine firms from 2009 to 2013 and the initial samples are obtained from the. i Un. v. Taiwan Economic Journal (TEJ). And also, I follow the definition of TEJ database that. Ch. engchi. (1) financial expert (FINEXP) is audit committee members who have prior working experience as an investment banker, financial analyst, or any other financial management role, and (2) accounting expert (ACCEXP) is AC members who have prior working experience as accountant, auditor, chief financial officer, controller, financial controller, or accounting officer. My empirical results can be summarized as follows. First, I provide support for the arguments in prior studies by documenting an insignificant relation between FINEXP and loan terms after controlling for the effect of ACCEXP on AC. Second, accounting experts have positively and significantly 4.

(11) relationship with the loan terms. In addition, the results also provide policy implication for policymakers. Specifically, public companies should establish an AC with at least one accounting expert from the bondholders’ point of view. Given these results of a positive relationship between accounting experts and loan term, firms could improve their reporting quality by the appointment of new AC members with accounting expertise, thus mitigating agency cost and information asymmetry, and then reducing the cost of debt by better loan terms. The remainder of this research is organized as follows. The second section reviews. 政治大 describes my research design. The fourth section reveals the empirical results, and the 立 relevant literature and describes the hypotheses development. The third section. ‧. ‧ 國. 學. final section presents the conclusions.. n. er. io. sit. y. Nat. al. Ch. engchi. 5. i Un. v.

(12) 2. LITERATURE REVIEW & HYPOTHESES DEVELOPMENT 2.1 Institutional Background In Taiwan, based on Corporate Governance Best Practice Principles for TWSE/ GTSM Listed Companies, a public company shall establish either AC or a supervisor in order to enhance financial reporting quality. AC is directly responsible for (i) monitoring the handling procedures for financial or operational actions, (ii) overseeing adoptions or amendments of internal control system, and (iii) providing recommendations on the hiring, discharge or compensation of an external auditor. By. 政治大. performing these functions, the AC can ensure that the company has effective internal. 立. controls system, appropriate accounting policies, and the independence of external. ‧ 國. 學. auditors. DeFond and Jiambalvo (1991) find that firms which overstate their earnings are less likely to have an AC. Moreover, Dechow, Sloan, and Sweeney (1996) and. ‧. McMullen (1996) show that firms involved in fraudulent financial statements are less. y. Nat. sit. likely to have an AC. There is also evidence that ACs with a majority of independent. n. al. er. io. directors reduce earnings management (Klein, 2002; Jenkins, 2003). In addition,. i Un. v. Krishnan (2005) finds that independent ACs and ACs with financial expertise are. Ch. engchi. significantly less likely to be associated with the incidence of internal control weakness. In the same vein, Zaman, Hudaib, and Haniffa (2011) indicate that effective ACs undertake more monitoring which results in wider audit scope, and thus, the company will have a higher quality and timely financial statements. Taken together, these studies provide a support that AC plays an important role in high financial reporting quality. However, the structure of an AC also affects its functions performed and effectiveness.. 6.

(13) 2.2 Audit Committee Expertise Recent studies indicate that firms with AC experts typically have the incentive and the ability to provide high-quality financial reporting. For example, Abbott, Parker, and Peters (2002) find that AC characteristics are related to financial fraud and misstatements. The Blue Ribbon Committee proposed that at least one AC member should possess expertise in accounting or finance. The Securities and Exchange Commission (SEC) released Section 407 - Disclosure of Audit Committee Financial Expert (2002) that the AC of the public company is comprised of at least one member. 政治大 of Powers by Audit Committees of Public Companies, at least one of AC members shall 立. with financial expertise. Also, in Taiwan, based on Regulations Governing the Exercise. ‧ 國. 學. have financial expertise. All of these provisions are aimed to promote a high reporting quality by carrying out their functions effectively and improving the corporate. ‧. governance.. Nat. sit. y. Recent studies further indicate that effectiveness of AC is determined by its. n. al. er. io. characteristics. First, Madawaki and Amran (2013) find that ACs having an. i Un. v. independent chair and AC expertise were positively associated with financial reporting. Ch. engchi. quality. Second, DeFond, Hann, and Hu (2005) suggest that the market reacts favorably to the appointment of AC members with accounting expertise, but does not react to financial expertise. Third, Dhaliwal, Naiker, and Navissi (2010) find significant positive relation between accounting expertise and accruals quality. Fourth, Felo (2003) indicates that the fraction of members with financial or accounting expertise on audit the committee is positively associated with financial reporting quality. Finally, Raghunandan, Rama, and Read (2001) show that ACs having at least one member with an accounting or financial background are more likely to review the internal auditing 7.

(14) program and results. The cumulative findings from an extensive body of AC literatures find association, to some degree, between AC expertise and financial reporting quality. As such, this study posits that either accounting or financial experts have positive effectiveness on financial reporting quality and corporate governance, and then will indirectly or directly impact the loan term.. 2.3 Financial Reporting Quality and Loan Terms Since the financial statements are critical for investors and stakeholders to evaluate. 政治大. the corporation’s value and make a decision, financial reporting quality may contribute. 立. to the loan term. For example, Anderson et al. (2004) find that the bondholders view. ‧ 國. 學. ACs as important elements in the financial reporting process. Second, Smith (1993) and Leftwich (1983) suggest that bondholders potentially exhibit great concern over factors. ‧. influencing the reliability and validity of the financial accounting process. Third,. y. Nat. io. sit. Blackwell et al. (1998) also suggest that firms who purchase audits to promote financial. n. al. er. reporting quality pay lower rates than those that do not. Fourth, Bharath et al. (2004). Ch. i Un. v. indicate that the poor accounting quality reflects limited information about the firms’. engchi. future operations and then is priced by bondholders. In addition, Pittman and Fortin (2004) find that the use of high-quality auditor to enhance financial reporting quality lowers a firm’s interest cost. Collectively, there seems to be a strong consensus amongst researchers that financial reporting quality is particularly critical in determining the loan term.. 8.

(15) 2.4 Corporate Governance and Loan Terms Extant research has explored widely the role of corporate governance, especially in enhancing the effectiveness of board, mitigating agency cost and reducing information asymmetry between the firm and debtors (Anderson et al., 2004; Lorca, Sánchez-Ballesta, and García-Meca, 2011). AC is one of operating committees of board and plays a vital role in corporate governance (Klein, 2002; Felo et al., 2003; Bédard et al., 2004; DeZoort et al., 2008). These studies provide support for the argument that board monitoring effectiveness can be deemed as a greater assurance with respect to. 政治大 mechanism which is likely to limit managerial opportunism and reduce the information 立. the financial reporting integrity. As a result, investors will rely heavily on monitoring. ‧ 國. 學. asymmetry problem, and consequently charge a lower rate to borrowers. Anderson et al. (2004) indicates that there is a negative relationship between cost of debt and board. ‧. independence as well as board size. Lorca et al. (2011) further conclude that the board. sit. y. Nat. meeting frequency, as proxied by the monitoring efforts, is strongly correlated with cost. n. al. er. io. of debt. In addition, Bhojraj and Sengupta (2003) find similar evidence in bond market,. v. and show that the level of institutional ownership and outside control right are. Ch. engchi. negatively associated with bond yield spreads.. i Un. Most recently, Hasan, Song, and Wachtel (2014) find that firms with superior disclosure policies, as proxied by more transparent financial information, reduce lenders’ information search cost and monitoring efforts, and thus obtain loans with more favorable loan contracting terms, such as larger amounts, longer maturity, and lower spread. In sum, these studies suggest that lenders take into account the stronger corporate governance, which contributes to better loan terms by lower cost of debt since reducing agency problems and information risk. Superficially, it seems that there is a 9.

(16) positive relation between loan terms and the corporate governance.. 2.5 Hypothesis Development I extend the line on literature on AC expert by first examining the effect of AC on financial reporting quality, second discussing the importance of financial and accounting expert to effectiveness of AC, and finally finding the impact of financial reporting quality and corporate governance on loan terms by lower cost of debt. Recent research further shows the impact of financial and accounting experts on bondholders.. 政治大. For example, Smith (1993) and Leftwich (1983) suggest that bondholders potentially. 立. exhibit great concern over factors influencing the reliability and validity of the financial. ‧ 國. 學. accounting process. In addition, Anderson et al. (2004) further indicate that the creditors view ACs and their characteristics as important elements in the financial accounting. ‧. process. The implication is that characteristics of AC have an association with loan. y. Nat. io. sit. terms. However, since these studies have not examined the impact of accounting or. n. al. er. finance expertise respectively, the results of these studies might be driven by one of these expertise types. Ch. engchi. i Un. v. Recent studies further argue that financial experts are positively associated with financial reporting quality. First, Felo et al. (2003) find the evidence of a positive relationship between the fraction of AC members with financial expertise and financial reporting quality. Second, Farber (2005) proposes that fraudulent reporting firms are less likely to have ACs with financial expertise. Third, Krishnan (2005) finds that ACs with financial expertise are significantly less likely to be associated with the incidence of internal control problems. Furthermore, Badolato et al. (2014) conclude that ACs with financial expertise are more effective at deterring earnings management. As a 10.

(17) result, I develop following testable hypothesis on the positive relation between financial experts and loan terms.. H1: There is a positive relationship between AC members with financial expertise and loan terms.. Since AC members are responsible for tasks that require a high degree of accounting sophistication, accounting expertise may be more important for AC. 政治大. members (DeFond et al., 2005), and for financial reporting quality by recognizing. 立. problems and asking probing questions of management (Libby and Luft, 1993; Scarpati,. ‧ 國. 學. 2003; Lipman, 2004). Moreover, AC members themselves also believe that accounting The current study provides. ‧. expertise is vital for AC service (Dezoort, 1997; 1998).. explicit evidence that accounting expertise is positively associated with firm credit. y. Nat. er. io. sit. ratings (Ashbaugh-Skaife, Collins and LaFond, 2004). Based on these arguments, I further predict that the association between accounting experts and loan terms is. n. al. Ch. i Un. v. significantly positive. Therefore, I formulate second hypothesis in this study as follows.. engchi. H2: There is a positive relationship between AC members with accounting expertise and loan terms.. So far there is limited evidence concerning whether the impact of accounting experts alone on loan terms is larger than the impact of financial experts alone. Prior research suggests that accounting experts are the most effective financial experts in 11.

(18) enhancing AC’s monitoring role (Carcello et al., 2006; Qin, 2007; Krishnan and Visvanathan, 2008). In addition, Davidson, Xie, and Xu (2004) and DeFond et al. (2005) document that a positive market reaction to the appointment of new AC members with accounting expertise, but have no such effects for the appointment of AC members with financial expertise. Furthermore, Anderson et al. (2004) find no relation between cost of debt and financial experts serving on AC. Collectively, all of these studies suggest that accounting experts are more important than financial experts. Therefore, this study presents third hypothesis that the impact of accounting experts may be greater than the impact of financial experts on loan terms.. 立. 政治大. ‧ 國. 學. H3: Loan term is pronounced mainly by AC with accounting experts alone rather than by AC with financial experts alone.. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. 12. i Un. v.

(19) 3. RESEARCH DESIGN 3.1 Sample and Data Sources The initial samples adopted in this study were obtained from the Taiwan Economic Journal (TEJ). TEJ founded in April 1990 in Taiwan is an online database that contains a variety of financial and nonfinancial data on companies throughout Asia. In 2009 to 2013, total number of bonds issued by TWSE/GTSM listed companies from 2009 to 2013 in Taiwan is 814. In this research, I require bonds published by companies that are TWSE/GTSM listed companies with ACs in order to analyze the effect of AC. 政治大. experts on loan terms. Therefore, after merging bond data and AC data, the number of. 立. 學. ‧ 國. final sample is 93. Table 1 shows the sample selection procedure. [Insert Table 1]. ‧ y. Nat. 3.2.1 Dependent Variables Measurement. n. al. Ch. er. io. sit. 3.2 Variable Choice. i Un. v. Following and extending prior research(Brigham, 1966; Brennan and Schwartz,. engchi. 1977; Bharath and Dittmar, 2006; Bharath et al., 2006; Paige-Fields et al., 2012; Chan, K. CW Chen, and T.Y. Chen., 2013), I use four dependent variables, RATE, MATURITY, CONVERTIBLE, and COLLATERAL as poxies for the loan terms adopted in this study. 1.. RATE: bond’s stated rate when it is issued. 2.. MATURITY: the length of time between bond’s issue date and maturity date.. 3.. CONVERTIBLE: a dummy variable equals to 1 if the bond is issued with. 13.

(20) conversion right to convert the bond into common stock in the issuing company, and 0 otherwise. 4.. COLLATERAL: a dummy variable equals to 1 if the bond is collateralized, and 0 otherwise.. 3.2.2 Test Variables Measurement. The main interest in this study is in examining whether an audit committee with at least one financial expert or accounting expert contributes to better loan terms, and. 政治大. whether AC with accounting experts alone contributes to better loan terms than AC. 立. with financial experts alone. First, I develop a measure, FINEXP, which captures the. ‧ 國. 學. extent of AC financial expertise based on the information about the borrower’s accounting committee member’s background. Numerous studies have appeared in. ‧. recent decade regarding the definition of financial expertise on AC under SOX 407. y. Nat. io. sit. (SEC’s final rule 2003; DeFond et al., 2005; Krishnan and Visvanathan, 2008; Dhaliwa. n. al. er. et al., 2010; Krishnan, Wen, and Zhao, 2011). In this study, I follow the definition of. Ch. i Un. v. TEJ database that financial expert (FINEXP) is AC member who has prior working. engchi. experience as an investment banker, financial analyst, or any other financial management role. I define two types of financial experts on the AC as follows: 1.. FINEXP-D: if firm’s AC with at least one financial expert, then FINEXP-D is coded 1, and 0 otherwise.. 2.. FINEXP-O: if firm’s AC with only financial experts, then FINEXP-O is coded 1, and 0 otherwise.. 14.

(21) In addition, I also follow the definition of TEJ database and define a test variable, ACCEXP, equal to one if the borrower’s AC member with prior experience as accountant, auditor, chief financial officer, controller, financial controller, or chief accounting officer. Even though the qualification of financial expertise adopted by SEC includes accounting and non-accounting financial expertise, I specifically focus on accounting financial expertise and also follow the definition from TEJ database. I classify accounting experts into two groups and construct two indicator variables: 1.. ACCEXP-D: if firm’s AC with at least one accounting expert, then ACCEXP-. 政治大 ACCEXP-O: if firm’s 立 AC with only accounting experts, then ACCEXP-O is D is coded 1, and 0 otherwise.. 2.. ‧ 國. 學. coded 1, and 0 otherwise.. Accordingly, under these classifications, this study can provide direct evidence to. ‧. highlight the different situation in the presence of financial and accounting expert and. y. Nat. n. al. Ch. engchi. er. io. debt, and then rewarding better loan terms.. sit. their separate impacts on enhancing financial reporting quality, reducing the cost of. i Un. v. 3.2.3 Control Variables Measurement Built upon the findings of literature (Felo et al., 2003; Li, Xie, and Zhou, 2010; Dhaliwal et al., 2010), I incorporate three groups of control variables into my analysis: governance, firm, and bond characteristics. The first group is related to governance characteristics, including number of meetings, number of directors, and average attendance. The second group is firm characteristics, including firm’s size, return on. 15.

(22) asset, earning before tax margin, liability ratio, and the size of external auditor firm. The third group is bond characteristics. Governance characteristic variables (1) Audit committee size (ACSIZE) In Taiwan, based on Corporate Governance Best Practice Principles for TWSE/GTSM Listed Companies, the number of AC shall not be fewer than three. The Blue Ribbon Committee also proposes that an AC should have a minimum of three members. This suggests that a minimum of three persons. 政治大. is necessary for a functional AC. Felo et al. (2003) find that there is a positive. 立. relationship between the size of AC and financial reporting quality.. 學. ‧ 國. Accordingly, I expect AC size to be positively correlated with loan terms.. ‧. (2) Audit committee meeting frequency (ACMEET). sit. y. Nat. Strong AC governance attributes may even lead to more effective use of any expertise possessed by individual AC members (Cohen et al., 2004). As. io. er. 1.. al. iv n C governancehand i U at overseeing e nmore g c heffective n. a result, it is possible that AC that meets more frequently is more likely to enhance AC. the financial. reporting process. Anderson et al. (2004) also indicate that AC meeting frequency exhibits a positive relation with loan terms. Accordingly, I control for this variable. (3) Average attendance of AC members (ATTENDANCE) Average attendance is average percentage that audit each committee member attends the meetings. Some studies argue that the financial quality is affected by not only meeting frequency but also by attendance at meetings 16.

(23) (Stewart and Munro, 2007). Therefore, I control for this variable and expect a positive correlation between ATTENDANCE and loan terms. (4) Board size (BDSIZE) Klein (1998) indicates that the number of directors on the board affects committee assignments and board monitoring. Furthermore, Anderson et al. (2004) find that debt yields are negatively related to board size since larger boards may increase the level of managerial monitoring and enhance the financial accounting process. These studies suggest that larger board leads to. 政治大 indicate that larger 立board of directors reduces firm value. Since there is. higher financial quality. However, Eisenberg, Sundgren, and Wells (1998). ‧ 國. 學. divergence of board size effects in prior studies, I make no prediction about the sign of the board size coefficient.. ‧ er. io. sit. y. Nat. (5) Board meeting frequency (BDMEET). al. iv n C even lead to more effective h eusenofgany i U possessed by individual AC c hexpertise n. Cohen et al. (2004) indicate that strong AC governance attributes may. members. Furthermore, Magena and Pike (2004) find that board meeting frequency may improve the financial accounting process. Accordingly, I control for this variable. (6) Establish the AC under regulatory requirement (ACLAW) Prior research suggests that an effective AC can contribute to high financial reporting quality (Wild, 1996; McMullen, 1996; Felo et al., 2003; Krishnan, 2005; Anderson et al., 2004; Zaman et al., 2011; Madawaki et al., 17.

(24) 2013). In Taiwan, the policymaker requires certain kind of public companies to establish the AC, including finance company and TWSE/GTSM listed company whose paid-up capital is more than 10 billion dollars. Therefore, I control for this variable and expect a positive relation between ACLAW and loan terms. Firm characteristics variables (1) Firm size (SIZE) Since firm size is positively related to financial reporting quality ( Felo. 政治大. et al., 2003), and the creditors perceive larger firms as less risky and smaller. 立. economies of scale in debt production costs (Carey, Prowse, Rea, and. Udell,. 學. ‧ 國. 1993), I control for this variable. In this study, SIZE is measured as the natural log of total assets at year-end.. ‧. 𝑆𝐼𝑍𝐸 = 𝐿𝑛(𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠). sit. y. Nat. (2) Return on asset (ROA). io. n. al. er. 2.. i Un. v. Return on asset is an important indicator of firm’s performance. It is. Ch. engchi. used to evaluate how effectively and efficiently firm uses its assets to generate earnings. In this study, I measure this control variable as 𝑅𝑂𝐴 =. Continuing Operations Income+Interest Expense∗(1−17%) Average Total Assets. * 100%. (3) Earnings before interest, tax, depreciation, and amortization(EBITDA) EBITDA is a measure of firm’s performance and an important indicator to creditors and investors. Therefore, I expect a positive relationship between EBITDA and loan terms. In this study, EBITDA is calculated as 18.

(25) 𝐸𝐵𝐼𝑇𝐷𝐴 =. 𝐼𝑛𝑐𝑜𝑚𝑒 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 Operating Revenue. * 100%. (4) Liability ratio (LEVERAGE) Leverage is an essential tool to maximize firm’s returns and an important ratio for potential creditors and investors. Some studies conclude that a negative relationship between leverage and profitability (Babalola, 2013; Kebewar, 2012; Dogan, 2013). Accordingly, I control for this variable and expect a negative relationship between LEVERAGE and loan terms. 𝐷𝑒𝑏𝑡. 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 = Debt+Equity * 100%. 學. ‧ 國. 立. 政治大. (5) Big four audit firms (BIG4). ‧. Prior studies suggest that larger firms tend to choose Big Six auditors. y prior. studies. (e.g.,. io. sit. Following. Ernst. &. Young,. er. 1994).. Nat. (Francis and Krishnan, 1999) and pay lower interest rates (Petersen and Rajan,. al. PricewaterhouseCoopers, KPMG, Deloitte), I control for this dummy. n. iv n C variable BIG4, equal to 1hif auditor is big 4 U e n g c h i audit firm, and expect a negative association between BIG4 and loan terms. 3.. Bond Characteristics Variables (1) The risk-free rate of interest (RF) In this study, I use Central bank announced average rate of one-year time deposit account in top 5 banks as control variable. The risk-free rates of interest from 2009 to 2013 are 0.9, 1.135, 1.355, 1.355, and 1.355, respectively. 19.

(26) (2) The frequency of interest payments per year (INTERESTPAY) INTERESTPAY is a dummy variable in this study. I find some firms pay their interests only at maturity and period is more than one year, so I control for the number that a firm pays interest in a year. (3) Ways to pay off (METHODPAY) There are many ways to pay off, including lump sum, installment, and other ways. I expect that different way will lead to different loan terms. Therefore, I control for this variable.. 政治大. Detailed definitions of the below variables are summarized in Appendix A.. 立. ‧ 國. 學. 3.3 Empirical Model. This study extends the literature on bond by investigating the relationship between. ‧. AC experts, the price, and non-price terms in bonds. I consider four important loan. Nat. sit. y. terms commonly discussed in prior studies, including bond rate, bond maturity,. n. al. er. io. convertible bond issuance, and collateral requirement. I test my hypotheses based on the following regression model:. Ch. engchi. i Un. v. 𝑪𝒐𝑫 = 𝛼0 + 𝛼1 𝐹𝐼𝑁𝐸𝑋𝑃𝑖𝑡 + 𝛼2 𝐴𝐶𝐶𝐸𝑋𝑃𝑖𝑡 + 𝛴𝛼𝑖 𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒 𝐶ℎ𝑎𝑟𝑎𝑐𝑡𝑒𝑟𝑖𝑠𝑡𝑖𝑐𝑠𝑖𝑡 +𝛴𝛼𝑖 𝐹𝑖𝑟𝑚 𝐶ℎ𝑎𝑟𝑎𝑐𝑡𝑒𝑟𝑖𝑠𝑡𝑖𝑐𝑠𝑖𝑡 + 𝛴𝛼𝑖 𝐵𝑜𝑛𝑑 𝐶ℎ𝑎𝑟𝑎𝑐𝑡𝑒𝑟𝑖𝑠𝑡𝑖𝑐𝑠𝑖𝑡 + 𝜀. The main interest in this study is four AC expertise indicator variables (FINEXPD, ACCEXP-D, FINEXP-O, ACCEXP-O). I also control for a set of control variables related to loan terms. To be consistent with my all hypotheses, I expect 𝛼1 and 𝛼2 to 20.

(27) be negative when the dependent variables are RATE, CONVERTIBLE, and COLLATERAL; but to be positive when the dependent variable is MATURITY.. 3.3.1 The Impact of AC Experts on Bond Rate In this study, I use three different regression models to examine the association between experts and loan terms. For each model using different dependent variables, I include a set of control variables documented to be associated with loan terms such as government regulations, characteristics of AC and board, and financial information of. 政治大. firms. To evaluate the impact of experts on loan terms, I specify the three regression. 立. models as follows.. ‧ 國. ‧. Model 1. 學. 1.. sit. y. Nat. 𝑅𝐴𝑇𝐸 = 𝛼0 + 𝛼1 FINEXP + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶𝐸. n. al. er. io. +𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑅𝑂𝐴 + 𝛼9 𝐸𝐵𝐼𝑇𝐷𝐴. Ch. i Un. v. +𝛼10 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛼11 𝐵𝐼𝐺4 + 𝛼12 𝐼𝑁𝑇𝐸𝑅𝐸𝑆𝑇𝑃𝐴𝑌. engchi. +𝛼13 𝑀𝐸𝑇𝐻𝑂𝐷𝑃𝐴𝑌 + 𝛼14 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 + 𝜀 (1) 2.. Model 2 𝑅𝐴𝑇𝐸 = 𝛼0 + 𝛼1 ACCEXP + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶𝐸 +𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑅𝑂𝐴 + 𝛼9 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝛼10 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛼11 𝐵𝐼𝐺4 + 𝛼12 𝐼𝑁𝑇𝐸𝑅𝐸𝑆𝑇𝑃𝐴𝑌. 21.

(28) +𝛼13 𝑀𝐸𝑇𝐻𝑂𝐷𝑃𝐴𝑌 + 𝛼14 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 + 𝜀 (2) 3.. Model 3 𝑅𝐴𝑇𝐸 = 𝛼0 + 𝛼1 FINEXPONLY + 𝛼2 ACCEXPONLY + 𝛼3 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼4 𝐴𝐶𝑀𝐸𝐸𝑇 +𝛼5 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶𝐸 + 𝛼6 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼7 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼8 𝐴𝐶𝐿𝐴𝑊 + 𝛼9 𝑅𝑂𝐴 +𝛼10 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝛼11 𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸 + 𝛼12 𝐵𝐼𝐺4 + 𝛼13 𝐼𝑁𝑇𝐸𝑅𝐸𝑆𝑇𝑃𝐴𝑌 +𝛼14 𝑀𝐸𝑇𝐻𝑂𝐷𝑃𝐴𝑌 + 𝛼15 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 + 𝜀. 立. 政治大. (3). RATE is the stated rate on bond when bond is issued. This measure is equal to the. ‧ 國. 學. interest the borrower pays to the lenders. The other variables are defined in the prior. ‧. section and summarize in appendix A. Over recent decades, numerous studies document the relationship between financial reporting quality and loan terms. y. Nat. er. io. sit. (Anderson et al., 2004; Bharath, J. Sunder, and S. V. Sunder, 2008; Paige-Fields, Fraser, and Subrahmanyam, 2012). More recently, Chan et al. (2013) extend those arguments,. n. al. Ch. i Un. v. and document that clawback provisions increase financial reporting quality and reduce. engchi. the degree of information asymmetry between borrowers and lenders, where leads to a decrease in the interest rates charged by lenders. To be consistent with third hypothesis, H3, I expect the signs of 𝛼1 and 𝛼2 in Model 3 to be negative, implying that bondholders are more likely to respond favorably to firms with financial or accounting experts on the AC by charging lower bond rate. Moreover, in Model 3, to be consistent with third hypothesis, H3, I also expect 𝛼1 to be less than 𝛼2 . This implication is that the impact of accounting experts on the rate would be larger than the impact of financial experts. 22.

(29) 3.3.2 The Impact of AC Experts on Bond Maturity To evaluate the impact of AC experts on loan terms, I specify the following equations:. 1.. Model 1. 𝑀𝐴𝑇𝑈𝑅𝐼𝑇𝑌 = 𝛼0 + 𝛼1 FINEXP + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶. 政治大. +𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑅𝑂𝐴 + 𝛼9 𝐵𝐼𝐺4. 立. +𝛼10 𝑅𝐹 + 𝜀. ‧ 國. ‧. Model 2. 學. 2.. (4). sit. y. Nat. 𝑀𝐴𝑇𝑈𝑅𝐼𝑇𝑌 = 𝛼0 + 𝛼1 𝐴𝐶𝐶𝐸𝑋𝑃 + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶𝐸. n. al. er. io. +𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑅𝑂𝐴 + 𝛼9 𝐵𝐼𝐺4 +𝛼10 𝑅𝐹 + 𝜀. 3.. Ch. engchi. i Un. v. Model 3 𝑀𝐴𝑇𝑈𝑅𝐼𝑇𝑌 = 𝛼0 + 𝛼1 𝐹𝐼𝑁𝐸𝑋𝑃𝑂𝑁𝐿𝑌 + α2 𝐴𝐶𝐶𝐸𝑋𝑃𝑂𝑁𝐿𝑌 + 𝛼3 𝐴𝐶𝑆𝐼𝑍𝐸 +𝛼4 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼5 𝐴𝑇𝑇𝐸𝑁𝐷𝐴𝑁𝐶𝐸 + 𝛼6 𝐵𝐷𝑆𝐼𝑍𝐸 +𝛼7 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼8 𝐴𝐶𝐿𝐴𝑊 + 𝛼9 𝑅𝑂𝐴 +𝛼10 𝐵𝐼𝐺4 + 𝛼11 𝑅𝐹 + 𝜀. 23. (5).

(30) (6) MATURITY is the length of time between bond’s issue date and maturity date. The other variables are defined in prior section and summarized in appendix A. The extent literature documents some degree of association between maturity and borrower’s information quality (Chan et al., 2013). In addition, Bharath and Dittmar (2006) also indicate that the lower quality borrowers face a higher economic cost in securing the funds for shorter maturity. These prior arguments imply that there is a negative relationship between maturity and debt cost. To be consistent with third hypothesis, H3,. 政治大 likely to offer a longer maturity to those borrowers with financial or accounting experts 立. I expect the signs of 𝛼1 and 𝛼2 to be positive, implying that bondholders are more. ‧ 國. 學. on the AC. Moreover, to be consistent with third hypothesis, H3, I also expect 𝛼1 to be less than 𝛼2 . This implication is that the impact of accounting experts on maturity. ‧. would be larger than the impact of financial experts.. io. sit. y. Nat. n. al. er. 3.3.3 The Impact of AC Experts on Convertible Bonds Issuance. Ch. i Un. v. To evaluate the impact of AC experts on loan terms, I specify the following equations:. 1.. engchi. Model 1. 𝐶𝐻𝐴𝑁𝐺𝐸 = 𝛼0 + 𝛼1 𝐹𝐼𝑁𝐸𝑋𝑃 + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐵𝐷𝑆IZE +𝛼5 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼6 𝐴𝐶𝐿𝐴𝑊 + 𝛼7 𝑅𝑂𝐴 + 𝛼8 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝜀 (7). 24.

(31) 2.. Model 2 𝐶𝐻𝐴𝑁𝐺𝐸 = 𝛼0 + 𝛼1 𝐴𝐶𝐶𝐸𝑋𝑃 + 𝛼2 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼4 𝐵𝐷𝑆𝐼𝑍𝐸 +𝛼5 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼6 𝐴𝐶𝐿𝐴𝑊 + 𝛼7 𝑅𝑂𝐴 + 𝛼8 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝜀 (8). 3.. Model 3. 𝐶𝐻𝐴𝑁𝐺𝐸 = 𝛼0 + 𝛼1 𝐹𝐼𝑁𝐸𝑋𝑃𝑂𝑁𝐿𝑌 + 𝛼2 𝐴𝐶𝐶𝐸𝑋𝑃𝑂𝑁𝐿𝑌 + 𝛼3 𝐴𝐶𝑆𝐼𝑍𝐸 + 𝛼4 𝐴𝐶𝑀𝐸𝐸𝑇 +𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑅𝑂𝐴 + 𝛼9 𝐸𝐵𝐼𝑇𝐷𝐴 + 𝜀. 立. 政治大. (9). CNANGE is a dummy variable equals to 1 if the bond is issued with conversion. ‧ 國. 學. right that is a value-added component of convertible bond as the bondholder’s right to. ‧. convert the bond into common stock in the issuing company, and 0 otherwise. The other variables are defined in prior section and summarize in appendix A. Prior studies. y. Nat. er. io. sit. suggest that riskier firms have higher propensity to issue the convertible bonds to attract creditors and investors (Brigham, 1966; Brennan and Schwartz, 1977). These prior. n. al. Ch. i Un. v. arguments imply that there is a relationship between convertible bond issuance and debt. engchi. cost. To be consistent with third hypothesis, H3, I expect the signs of 𝛼1 and 𝛼2 to be negative, implying that bondholders are less likely to require conversion right of bond to those borrowers with financial or accounting experts on the AC. Moreover, to be consistent with third hypothesis, H3, I also expect 𝛼1 to be less than 𝛼2 . This implication is that the impact of accounting experts on non-convertible bond issuance would be larger than the impact of financial experts.. 25.

(32) 3.3.4 The Impact of AC Experts on Collateral Requirement To evaluate the impact of AC experts on loan terms, I specify the following equations:. 1.. Model 1 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 = 𝛼0 + 𝛼1 𝐹𝐼𝑁𝐸𝑋𝑃 + 𝛼2 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼3 𝐴𝑇𝑇𝐸𝐷𝐴𝑁𝐶𝐸 +𝛼4 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼5 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼6 𝐴𝐶𝐿𝐴𝑊 + 𝛼7 𝑆𝐼𝑍𝐸. 政治大. +𝛼8 𝑅𝑂𝐴 + 𝛼9 𝑅𝐹 + 𝜀. 立. ‧ 國. ‧. Model 2. 學. 2.. (10). sit. y. Nat. 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 = 𝛼0 + 𝛼1 ACCEXP + 𝛼2 𝐴𝐶𝑀𝐸𝐸𝑇 + 𝛼3 𝐴𝑇𝑇𝐸𝐷𝐴𝑁𝐶𝐸. n. al. er. io. +𝛼4 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼5 𝐵𝐷𝑀𝐸𝐸𝑇 + 𝛼6 𝐴𝐶𝐿𝐴 + 𝛼7 𝑆𝐼𝑍𝐸. +𝛼8 𝑅𝑂𝐴 + 𝛼9 𝑅𝐹 + 𝜀. 3.. Ch. engchi. i Un. v. (11). Model 3 𝐶𝑂𝐿𝐿𝐴𝑇𝐸𝑅𝐴𝐿 = 𝛼0 + 𝛼1 FINEXPONLY + 𝛼2 ACCEXPONLY + 𝛼3 𝐴𝐶𝑀𝐸𝐸𝑇 +𝛼4 𝐴𝑇𝑇𝐸𝐷𝐴𝑁𝐶𝐸 + 𝛼5 𝐵𝐷𝑆𝐼𝑍𝐸 + 𝛼6 𝐵𝐷𝑀𝐸𝐸𝑇 +𝛼7 𝐴𝐶𝐿𝐴𝑊 + 𝛼8 𝑆𝐼𝑍𝐸 + 𝛼9 𝑅𝑂𝐴 + 𝛼10 𝑅𝐹 + 𝜀 (12). 26.

(33) COLLATERAL is a dummy variable equal to 1 if the bond is collateralized, and 0 otherwise. The other variables are defined in prior section and summarize in appendix A. Paige-Fields et al. (2012) show that borrowers with more experience and more diverse boards are less likely to be required to provide collateral in loan contract. In addition, Chan et al. (2013) document a negative relation between financial quality and collateral requirement in loan contract. Also, Bharath et al. (2006) indicate that poorer accounting quality has a significant economic effect on borrowers in terms of higher collateral. Accordingly, these prior arguments imply that there is a positive relationship between collateral requirement and debt cost. To be consistent with third hypothesis,. 治政 H3, I expect the signs of 𝛼 and 𝛼 to be negative, implying 大 that bondholders are less 立 likely to require collateral to those borrowers with financial or accounting experts on 1. 2. ‧ 國. 學. the AC. Moreover, to be consistent with third hypothesis, H3, I also expect 𝛼1 to be. ‧. less than 𝛼2 . This implication is that the impact of accounting experts on non-collateral. n. al. er. io. sit. y. Nat. requirement would be larger than the impact of financial experts.. Ch. engchi. 27. i Un. v.

(34) 4. EMPIRICAL RESULTS 4.1 Descriptive Statistic Table 2 describes descriptive statistics for test variables in this study. I follow prior research and winsorize extreme observations at 5th and 95th percentiles. The means (median) of FINEXP-D and ACCEXP-D are 1 (0.58) and 0 (0.35), respectively. This result indicates that firms with at least one financial expert on AC are more than those with at least one accounting expert. We find similar result for FINEXP-O and ACCEXP-O, further indicating that firms with only financial experts on AC are more than with only accounting experts.. 立. 政治大. In addition, Table 2 also presents descriptive statistics for control variables that. ‧ 國. 學. attempt to remove measurement error in the loan term proxies. The mean (median) of. ‧. ACSIZE is around 4.17 (4), consistent with Corporate Governance Best Practice. sit. y. Nat. Principles for TWSE/ GTSM Listed Companies (2006) that AC should have more than. io. er. three members. The mean (median) of ACMEET is 6.99 (6) and ATTENDANCE is. al. iv n C rules require that AC members should h eattend h i Uor assign to other independent n g cmeetings n. 0.88 (0.95). The possible reason for high average attendance is that the government. directors, otherwise they would be removed. The financial performance varies widely across samples since sample firms include TWSE and GTSM listed companies. The mean (median) of SIZE is 26.28 (27.37), ROA is 6.56% (3.12%), EBITDA is 20.16% (18.97%), and LEVERAGE is 53.58% (48.54%). [Insert Table 2]. 28.

(35) 4.2 Pearson Correlations Table 3 provides the Pearson diagonal correlation coefficients among the variables used in this study. I mainly focus on the correlations between AC experts and loan terms. As predicted, first, the correlation between MATURITY and FINEXP-D, exhibit a significantly positive relation. However, FINEXP-D and FINEXP-O both have no relation with RATE, consistent with (Anderson et al. 2004). It also shows that FINEXPD is significantly and negatively correlated with CONVERTIBLE and COLLATERAL. Second, consistent with prior study (Ashbaugh-Skaife et al., 2005), the correlation. 政治大 positively associated with RATE and significant at 5% level. In addition, ACCEXP-D 立 between the presence of at least one accounting expert on the AC, ACCEXP-D, is. ‧ 國. 學. and ACCEXP-O both are positively related to MATURITY, and negatively related to CONVERTIBLE and COLLATERAL. To summarize, these correlations are consistent. ‧. with the views that bondholders take into consideration the accounting experts, either. sit. y. Nat. alone or jointly with financial experts, when valuing and investing on firms’ bonds.. n. al. er. io. The range of coefficients is from -0.95(CONVERTIBLE and INTERESTPAY) to. i Un. v. 0.92(RATE and INTERESTPAY). There is a serious multicollinearity when the. Ch. engchi. correlation coefficient between two variables is greater than 0.8. As in Table 3, most coefficients of variables are less than 0.8, indicating no strong correlation. There are only four coefficients greater than 0.8 or less than -0.8, including -0.866(RATE and CONVERTIBLE),. -0.864(CONVERTIBLE. and. SIZE),. 0.92(RATE. and. INTERESTPAY), and -0.95(CONVERTIBLE and INTERESTPAY). However, these variables are not put in one model, indicating that multicollinearity is not a concern in this study. [Insert Table 3] 29.

(36) 4.3 Regression Results 4.3.1 The Impact of AC Experts on Bond Rate In this section, I examine the relative effectiveness of the accounting experts in reducing the bond rate. Table 4 shows the results from the regression analysis of financial and accounting experts, as well as the control variables, on bond rate. In all regressions, we use a two-tailed test for the coefficients. Most importantly, most results of variance inflation factor (VIF) are less than 10, suggesting that there is no strong linear relation in each regression.. 政治大. In Table 4, three models are reported for comparative benchmarking purposes.. 立. Model 1 of Table 4 reports that there is a negative but insignificant association between. ‧ 國. 學. the financial experts and bond rate, implying that the presence of at least one financial expert on the AC is not significantly considered by bondholders. Model 2 explores the. ‧. effect of the AC with at least one accounting expert on bond rate. Consistent with my. y. Nat. io. sit. second hypothesis H2, the result reveals that the coefficient of ACCEXP-D is negative. n. al. er. and significant at 10% level, suggesting that accounting experts are associated with the. Ch. i Un. v. lower bond rate. The results present that, on average, the rate of bond issued by firm. engchi. with at least one accounting expert on AC is about 0.153percent lower than firm without any accounting expert. The results, coupled with the findings of Model 2, provide preliminary evidence that the differential bond rate is driven primarily by the accounting experts rather than financial experts. Model 3 is the main interest in my study. As predicted in H2, Model 2 reveals that the coefficient of ACCEXP-O is negative and significant, indicating that accounting experts are negatively associated with rate and significantly at 5% level. It also presents that the coefficient of FINEXP-O is negative but insignificant, suggesting 30.

(37) that only financial experts in the AC are not associated with the bond rate. These results provide supporting evidence of my third hypothesis H3 in this study. For these three regressions in Table 4, the coefficients of ACSIZE are insignificant but negative, consistent with a prior study (Felo et al., 2003). The results here indicate that after controlling for accounting and financial experts, there is no association between AC size and loan term. The coefficients of ACMEET are insignificant but positive, suggesting that AC meetings are insignificantly associated with rate. In addition, the coefficients of ATTENDANCE and BDSIZE are both. 政治大 of BDSIZE indicates that the board size is significantly negative associated with rate 立. insignificantly associated with rate. However, the negative and significant coefficient. ‧ 國. 學. since, consistent with prior research (Anderson et al., 2004). The coefficients of ACLAW, ROA, EBITDA, LEVERAGE and BIG4 are insignificant, suggesting that. ‧. whether firms are required to establish the AC and the firm specific characteristics are. y. sit. n. al. er. io. experts.. Nat. insignificantly associated with rate after controlling for accounting and financial. i Un. v. To summarize, the results in Table 4 show the evidence that compared to firms. Ch. engchi. with at least one financial expert or only financial experts on the AC, firms with at least one accounting expert or only accounting experts on AC have better loan term by lower rate. In addition, the results also provide the evidence that the number of board meeting is significantly associated with lower rate. 4.3.2 The Impact of AC Experts on Bond Maturity In this section, I examine the relative effectiveness of experts in increasing the bond maturity. Table 5 presents the results from the regression analysis of financial and accounting experts, as well as the control variables, on bond maturity. In all regressions, 31.

(38) we use a two-tailed test for the coefficients. Most importantly, most results of VIF are less than 10, suggesting that there is no strong linear relation in each regression. In Table 5, three models are reported for comparative benchmarking purposes. Model 1 of Table 5 reports that there is a positive but insignificant association between the financial experts and bond maturity, implying that the presence of at least one financial expert on the AC is insignificantly related to shorter maturity. Model 2 explores the impact of the AC with at least one accounting expert on bond maturity. Consistent with my second hypothesis H2, the result reveals that the coefficient of. 政治大 are associated with the longer maturity of bond. The results present that, on average, 立. ACCEXP-D is positive and significant at 5% level, suggesting that accounting experts. ‧ 國. 學. the maturity of bond published by firm with at least one accounting expert on AC is about 1.1percent lower than maturity by firm without any accounting expert. The results,. ‧. coupled with the findings of Model 2, provide preliminary evidence that the differential. sit. y. Nat. maturity is driven primarily by the accounting experts rather than financial experts.. n. al. er. io. Model 3 is the main interest in my study. As predicted in H2, Model 2 reveals. i Un. v. that the coefficient of ACCEXP-O is positive and significant at 5% level, indicating. Ch. engchi. that accounting experts are significantly associated with bond maturity. It also presents that the coefficient of FINEXP-O is positive but insignificant, suggesting that only financial experts on AC are not associated with bond maturity. These results provide supporting evidence of my third hypothesis H3. For these three regressions in Table 5, in governance characteristics variables, except the coefficients of BDSIZE, the coefficients of ACSIZE, ACMEET, ATTENDENACE, and BDMEET are all insignificant. This result indicates that after controlling for accounting and financial experts, there is no association between AC 32.

(39) size, number of board and AC meetings, or attendance of members and loan term. The coefficients of BDSIZE are significantly positive, suggesting that board size is significantly associated with maturity. This result is consistent with prior study (Bharath et al. 2006). In addition, the coefficients of ACLAW show that whether firms are required to establish an AC is significant and positive, suggesting that required establishment is associated with maturity. And the coefficients of ROA and BIG4 are both insignificant. Finally, the coefficients of RF are negative and significant, indicating that there is significantly negative relationship between the risk-free rate of interest and maturity of bond.. 政治大 To summarize, the results in Table 5 show the evidence that compared to firms 立. ‧ 國. 學. with at least one financial expert or only financial experts on the AC, firms with at least one accounting expert or only accounting experts on AC have better loan term by longer. ‧. sit. Nat. and the lower free-risk of rate contribute to better loan terms.. y. maturity. In addition, the results also provide the evidence that the bigger board size. n. al. er. io. 4.3.3 The Impact of AC Experts on Convertible Bonds Issuance. Ch. i Un. v. In this section, I examine the relative effectiveness of experts in reducing the. engchi. propensity of convertible bond issuance. Table 5 presents the results from the regression analysis of financial and accounting experts, as well as the control variables, on convertible bond. In all regressions, we use a two-tailed test for the coefficients. Most importantly, most results of VIF are less than 10, suggesting that there is no strong linear relation in each regression. In Table 6, three models are reported for comparative benchmarking purposes. Model 1 of Table 6 reports that there is a positive but insignificant association between the financial experts and convertible bond, implying that the presence of at least one 33.

(40) financial expert on the AC is insignificantly related to convertible bonds issuance from bondholders’ point of view. Model 2 explores the impact of the AC with at least one accounting expert on convertible bond issuance. Consistent with my second hypothesis H2, the result reveals that the coefficient of ACCEXP-D is negative and significant at 5% level, suggesting that accounting experts are associated with the nonconvertible bond. The results present that, on average, the possibility of convertible bond published by firm with at least one accounting expert on AC is about 5.9percent lower than without any accounting expert. The results, coupled with the findings of Model 2, provide preliminary evidence that whether bond is convertible is driven primarily by. 治政 accounting experts rather than financial experts. 大立 ‧ 國. 學. Model 3 is the main interest in my study. As predicted in H2, Model 2 reveals that the coefficient of ACCEXP-O is negative and significant at 10% level, indicating. ‧. that accounting experts are significantly associated with convertible bond issuance. It. sit. y. Nat. also presents that the coefficient of FINEXP-O is positive but insignificant, suggesting. n. al. er. io. that only financial experts in the AC are not associated with the convertible bond. These. v. results provide supporting evidence of my third hypothesis H3.. Ch. engchi. i Un. For these three regressions in Table 6, in governance characteristics variables, except the coefficients of BDSIZE, the coefficients of ACSIZE, ACMEET, and BDMEET are all insignificant. This result indicates that after controlling for accounting and financial experts, there is no significant association between AC size or number of board and AC meetings and loan terms. The coefficients of BDSIZE are significantly negative, suggesting that board size is significantly associated with whether convertible bonds are issued. In addition, the coefficients of ACLAW are significant and negative, suggesting that after controlling for accounting and financial experts, firms required to 34.

(41) establish an AC are less likely to issue the convertible bonds. And the coefficients of ROA are insignificant, indicating that there is insignificant relationship between return on assets and whether firms issue the convertible bonds. Finally, the coefficients of EBITDA are negative and significant, indicating that there is significantly negative relationship between the earnings before interest, tax, depreciation, and amortization and whether firms issue the convertible bonds. To summarize, the results in Table 6 show the evidence that compared to firms with at least one financial expert or only financial experts on AC, firms with at least. 政治大 propensity to issue the convertible bonds. In addition, the results also provide the 立. one accounting expert or only accounting experts on AC have better loan term by lower. ‧ 國. 學. evidence that the bigger board size, required establishment of an AC, and the higher earnings before interest, tax, depreciation, and amortization contribute to better loan. Nat. io. sit. 4.3.4 The Impact of AC Experts on Collateral Requirement. y. ‧. terms.. n. al. er. In this section, I examine the relative effectiveness of experts in reducing the. Ch. i Un. v. requirement of collateral. Table 7 presents the results from the regression analysis of. engchi. financial and accounting experts, as well as the control variables, on collateral requirement. In all regressions, we use a two-tailed test for the coefficients. Most importantly, most results of VIF are less than 10, suggesting that there is no strong linear relation in each regression. In Table 7, three models are reported for comparative benchmarking purposes. Model 1 of Table 7 reports that, consistent with my first hypothesis H3, there is a positive but insignificant association between the financial experts and collateral requirement, implying that the presence of at least one financial expert on the AC is not 35.

(42) significantly related to collateral requirement. Model 2 explores the impact of the AC with at least one accounting expert on collateral requirement. Consistent with my second hypothesis H2, the result reveals that the coefficient of ACCEXP-D is negative and significant at 10% level, suggesting that accounting experts are associated with the nonconvertible bond. The results present that, on average, the propensity of collateral requirement on firms with at least one accounting expert on AC is about 4.4percent lower than without any accounting expert. The results, coupled with the findings of Model 2, provide preliminary evidence that collateral requirement is driven primarily by accounting experts rather than financial experts.. 政治大 Model 3 is the main interest in my study. As predicted in H2, Model 2 reveals that 立. ‧ 國. 學. the coefficient of ACCEXP-O is negative and significant, indicating that accounting experts are negatively associated with collateral and significantly at 10% level. It also. ‧. presents that the coefficient of FINEXP-O is positive but insignificant, suggesting that. sit. y. Nat. only financial experts in the AC are not associated with collateral. F-test shows that. n. al. er. io. there is significant difference in the coefficient for FINEXP-O and ACCEXP-O. More. v. importantly, collateral is attributable to AC with only accounting experts rather than. Ch. engchi. i Un. with only financial experts. These results provide supporting evidence of my third hypothesis H3. For these three regressions in Table 7, in governance characteristics variables, the coefficients of ACMEET, ATTENDANCE, BDSIZE, and BDMEET are all insignificant. This result indicates that after controlling for accounting and financial experts, there is no significant association between board size, number of board and AC meetings, or average attendance of AC members and the loan term. In addition, the coefficients of ACLAW are insignificant and negative, suggesting that after controlling 36.

(43) for accounting and financial experts, firms required to establish an AC are less likely to be required the collaterals. And the coefficients of SIZE and ROA are insignificant, indicating that there is insignificant relationship between firm size or return on assets and required collateral. Finally, the coefficients of RF are insignificant, indicating that the free-risk of rate is insignificant associated with whether collaterals are required. In sum, the results in Table 7 show the evidence that compared to firms with at least one financial expert or only financial experts on AC, firms with at least one accounting expert or only accounting experts on AC have better loan terms by lower. 政治大. propensity to be required of the collaterals.. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 37. i Un. v.

(44) 5. CONCLUSIONS Using a sample of 93 firm-year observations from 2009 to 2013, the objective of this study is to examine whether financial experts or accounting experts on an AC have a significant impact on loan terms. My findings can be summarized as follows. First, I find that accounting experts on the AC are associated with the better loan terms. Second, I find that loan terms are better when firm’s AC with only accounting experts than firm’s AC with only financial experts. These findings provide support for the growing literature on accounting experts and suggest that bondholders concern about audit. 政治大. quality, which about proxy by firms with accounting experts on the AC, when investing. 立. the bonds. Therefore, my empirical results provide supporting evidence of the view that. ‧ 國. 學. lenders infer financial reporting quality, at least some degree, from the characteristics of the AC. Furthermore, my results may also be interpreted mean that lenders consider. ‧. accounting experts on an AC more important than financial experts.. y. Nat. er. io. sit. In conclusion, my findings provide strong evidence to respond to prior research. For example, this study explicitly highlights the importance to consider how the agency. n. al. Ch. i Un. v. role of AC experts is influenced by their financial or accounting expertise. I suggest. engchi. that firms could consider appointing AC members with accounting expertise to help reduce the cost of debt by better loan terms. In addition, my findings also provide bondholders with an alternative choice of an effective monitoring mechanism in bondholder’s credit risk. Finally, I also suggest standard setters and regulators a future legislative effort to include at least one accounting expert on an AC.. 38.

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