Accounting Seminar（2013-22）

Topic:Real Cost Management

Speaker: Shunlan Fang,Temple University

Discussant:Lina Wu Le Luo , Peking University

Time:: Thursday,02 January,10:00-11:30am

Location:Room 217, Guanghua Building 2

Organizer:Department of Accounting, MPAcc GSM, PKU

Abstract：

This paper examines how, if at all, managers engage in real cost management around loan financing. The associated economic benefits of performance management can be substantial for borrowers taking loans. However, managers’ choices of actions are constrained by banks’ monitoring ability. I find that managers tend to improve cash flow by engaging in real cost management prior to loan financing. Moreover, cost management is asymmetric. Loan financing firms experiencing a sales decline manage cost downward to a greater extent than those experiencing a sales increase. The observed cost reduction has significant positive effects on cash flow and it is not driven by accrual management or other real management. After financing, firms taking loans exhibit an increase in their cost levels. Such a cost reversion is not driven by financing firms’ working capital constraints, investment expenditure or sales growth. I further show that costs are negatively associated with the intensity of covenants that are based on earnings. Overall, results suggest that managers’ choices of performance management approaches are shaped by banks’ monitoring ability and preferences.

Your participation is warmly welcomed!