AcF702 Advanced Topics in Corporate Finance

Department of Accounting and Finance

Lancaster University Management School

AcF702 (Advanced Topics in Corporate Finance)

Bank Loan Contracting

Mahmoud Gad

Summer 2024

MSc in Accounting and Financial Management

MSc in Finance

Course Outline

1. Contact details

Mahmoud Gad

Office: C41 m.gad1@lancaster.ac.uk

2. Course overview

In this summer term, you will engage in a series of lectures and workshops aimed at familiarising you with the fundamental literature and research techniques relevant to debt markets. The lectures and workshops will provide a solid foundation for the independent research that you will conduct.

Your independent research will involve two key components: (i) an extensive review of the academic literature related to your topic, and (ii) the collection and analysis of empirical data relevant to your topic. Through this process, you will gain a deep understanding of your topic and the ability to effectively communicate your findings.

3. Key dates

10th July 2024: First draft of the dissertation submitted for comments.

Week commencing 7th August 2024: Return of the first draft of dissertation with comments.

4th September 2024: Deadline to submit the final draft of the dissertation.

4. Course objectives

The main aim of the AcF702 course is to equip you with the necessary skills and knowledge to successfully complete the standard dissertation on debt contracting. Specifically, the lectures and workshops will:

• Provide a comprehensive introduction to the theoretical literature on debt contracting, serving as the foundation for the literature review portion (Part 1) of your dissertation;


• Offer an in-depth understanding of data wrangling, data visualization, and statistical analysis techniques, which will form the basis for your empirical analysis (Part 2) of the dissertation;

• Offer guidance and support for the practical aspects of producing a high-quality MSc dissertation, covering topics such as dissertation content, structure, style, referencing rules, presentation of results, and more.

5. Learning outcomes

Upon completion of the AcF702 course, you will be able to:

• Understand the importance of debt in determining a company's capital


• Acquire a thorough understanding of the key theories in debt contracting literature and the fundamental elements of debt contracts, including financial covenants.


• Critically evaluate and analyze key research papers in the field of debt


• Understand the debt market response to borrowers ESG


• Possess a proficient knowledge of using R for data analysis, data visualization, statistical methods, and programming, enabling you to conduct empirical research with


• Acquire the skills to effectively manage and manipulate syndicated loan


• Design and execute large-scale empirical tests on the topics covered in the course with accuracy and precision.

6. Taught course structure

The AcF702 course will be conducted over a series of sessions during the Summer Term.

The initial sessions of the course will be dedicated to the theoretical and empirical literature related to debt contracting. This material will serve as the foundation for the literature review portion (Part 1) of your dissertation. During select sessions, student groups will have the opportunity to present assigned papers, with each presentation lasting 15-20 minutes

Later sessions will focus on the practical aspects of the standard dissertation, including data wrangling and visualization techniques (using R), research methods, dissertation structure, writing skills, and presentation of results. These sessions will provide you with the necessary tools and skills to complete your dissertation with confidence and efficiency.

7. Dissertation Synopsis

Writing a dissertation can be a challenging task, especially when it comes to identifying and refining research questions. To help you overcome these and other obstacles, you are encouraged to create a one-page "Dissertation Synopsis." This document will summarize the key elements of your dissertation, including the relevant literature, research questions, hypotheses, methodology, and a proposed sequence of tables and figures

The Dissertation Synopsis will provide several benefits, including:

1. Focusing and structuring both your dissertation and your dissertation writing


2. Summarizing the key elements of your dissertation, making it easier to discuss your ideas and problems with the course director.

It is recommended that you start considering your research questions as early as possible and begin working on your Dissertation Synopsis no later than the third lecture. You are encouraged to discuss a draft of your Dissertation Synopsis with the course director for feedback and suggestions.

8. Readings

A list of recommended readings for each session is provided below. The reading material for this course primarily consists of articles published in academic journals. Please note that these reading lists are not exhaustive, and it is expected that in your dissertation you will demonstrate a comprehensive understanding of a broader range of relevant literature beyond what is covered in the course. You can access the articles through the university library's e-journal sites. https://onesearch.lancaster-university.uk/primo-explore/search?vid=LUL_VU1

Useful e-journal sites are ABI/INFORM GLOBAL, Business Source Premier, ScienceDirect, JSTOR. Below are examples of important journals:

• The Accounting Review


• Journal of Accounting Research


• The Journal of Finance


• Journal of Accounting and Economics


• Journal of Financial Economics


• Review of Financial Studies


• Journal of Political Economy

Furthermore, Google Scholar (http://scholar.google.co.uk) is a powerful tool to search for academic articles. In addition to e-journal sites for published articles, you should also use the Social Sciences Research Network website (www.ssrn.com) to source relevant unpublished material. Browsing through the hard-copy journals in the library is also a potentially fruitful way of identifying relevant literature.

R textbook:

"R for Data Science" by Hadley Wickham and Garrett Grolemund https://r4ds.had.co.nz/

Virtual Desktop (pre-installed R and other apps)

https://lancaster.apporto.com/

When using this virtual desktop please save all files, codes, etc on OneDrive.

Moodle:

Course materials and links to useful websites (including financial databases) will be made available via Moodle. You will need your university network username and password to access the site.

9-Lecture outline

The following section provides a comprehensive overview of the topics covered in each part, accompanied by a selection of readings. It is important to note that the readings listed here represent only a fraction of the available material and that a key aspect of a strong literature review (Part 1) will be demonstrating that you have independently located, read, and comprehended related literature.

Topic 1: Introduction to Debt Contracting and Loan Markets

In this session, I will provide an overview of the course and key dates, including practical tips on managing your time and information about student presentations.

We will then discuss the topic of debt contracting and loan markets, focusing on the theoretical framework that explains variations in loan terms and syndicate structure. An important area of research in accounting and finance examines the design of debt contracts and the terms they contain (e.g. loan price, maturity, collateral, etc.). We will also explore prior research that focuses on the determinants of syndicated loan structure (i.e. number of lenders and the fraction of loans retained by each bank).

Reading List:

• Katerina Simons, (1993) "Why do banks syndicate loans?" New England Economic Review, Federal Reserve Bank of Boston, pp. 45-52.

Empirical Papers:

• Costello, , Wittenberg-Moerman, R. (2011) "The impact of financial reporting quality on debt contracting: evidence from internal control weakness reports." Journal of Accounting Research, 49 (1), pp. 97-136.


• Kim, , Song, B. and Zhang, L. (2011) "Internal control weakness and bank loan contracting: Evidence from SOX section 404 disclosures." The Accounting Review, 86(4), pp. 1157- 1188.


• Jeong-Bon Kim and Byron Song (2011) "Auditor quality and loan syndicate structure." AUDITING: A Journal of Practice & Theory, 30 (4), pp. 71-99.

Topic 2: Literature Review and Introduction to R and Tidyverse

Session 2.1. Literature Review and Presentation

In this session, we will focus on providing a framework for evaluating research papers and designing compelling research to answer research questions. We will also cover the structure and writing of a research dissertation.

Reading List:

• Armstrong, C.S., Guay, W.R., Weber, J.P. (2010) "The role of information and financial reporting in corporate governance and debt " Journal of Accounting and Economics, 50 (2/3), pp. 179-234. (Section 5 only).


• Shivakumar, (2013) "The role of financial reporting in debt contracting and stewardship." Accounting and Business Research, 43(4), pp. 362-383.


• Gordon, T. P., Porter, J. C. (2009) "Reading and understanding academic research in accounting: A guide for " Global Perspective on Accounting Education, 6, pp. 25-45.


• Evans III, J. H., M. Feng, V. B. Hoffman, D. V. Moser, and W. A. Van der Stede. (2015) "Points to consider when self-assessing your empirical accounting " Contemporary Accounting Research, 32 (3), pp. 1162-1192.

Session 2.2. Introduction to R and Tidyverse

In this session, we will cover the basics of working with R, including basic R commands and data wrangling using R and the tidyverse. We will also look at merging and appending data.

Reading List:

• McKinley (2020) Introduction to R. Chapter 2 and Chapter 3

https://exeter-data-analytics.github.io/IntroToR/getting-started-in-r.html

https://exeter-data-analytics.github.io/IntroToR/fundamentals-of-r.html

• Wickham, , & Grolemund, G. (2020) R for data science: Import, tidy, transform, visualize, and model data. Chapter 5 and Chapter 7

https://r4ds.had.co.nz/transform.html https://r4ds.had.co.nz/exploratory-data-analysis.html

Topic 3: Data Visualization

In this session, we will focus on effective data visualization and how to communicate data insights through visualization. We will cover the grammar of data visualization and the common mistakes to avoid.

Reading List:

• Wickham, , & Grolemund, G. (2020) R for data science: Import, tidy, transform, visualize, and model data. Chapter 3.


• https://r4ds.had.co.nz/data-visualisation.html


• https://rkabacoff.github.io/datavis/

Topic 4: Regressions

In this session, we will speak to the concept of conditional distribution and the assumptions of regression analysis. We will then explore the panel data structure and the techniques of fixed effects regression and research design. Lastly, we will briefly discuss the topic of causal inference and the distinction between correlation and causation.

Reading list:

Huntington-Klein, N. (2022). The Effect: An Introduction to Research Design and Causality. Available at: https://theeffectbook.net/index.html

Topic 5: Borrowers ESG and Misreporting

• Guest speaker on modern slavery practices of companies (including an exercise).

• Corporate misreporting: a case study

In this session, we will examine the issue of misreporting and the response by banks. We will analyse data from Compustat and DealScan to investigate the impact of misreporting on loan terms.

Reading list:

• Graham, R., S. Li, and J. Qiu. 2008. Corporate misreporting and bank loan contracting. Journal of Financial Economics 89 (1): 4461.


• Amiram, , Bozanic, Z., Cox, J.D. et al. 2018. Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature. Review of Account Studies 23, 732 783


• Dyck,A. Morse, and Zingales, L. 2021. How pervasive is corporate fraud? Available at: https://ssrn.com/abstract=2222608

• https://www.ft.com/content/765fc482-68db-11e8-b6eb-4acfcfb08c11

- https://www.ft.com/content/5823a7cc-4279-11e4-9818-00144feabdc0

Additional reading:

• Section 5 from Armstrong et al (2010)


• Shivakumr (2013)

Topic 6 Writing, Presentation and Replication

Session 6.1 Practical Dissertation Tips: Writing and Presentation Skills

In this session, we will explore key aspects of writing and presenting an MSc dissertation. The topics covered will include: characteristics of an effective literature review; connecting the literature review with empirical analyses; structuring empirical analysis chapters; proper referencing; presenting tables and discussing results; utilizing footnotes and appendices; and general presentation considerations, such as spelling and grammar.

Session 6.2 Dissertation Ideas and Replication: Kim and Song (2011)

In this session, we will discuss various dissertation ideas and attempt to replicate the study by Kim and Song (2011) using updated data.

Group Presentations:

Group 1:

Dennis, S. A., and Mullineaux, D. J. (2000). Syndicated Loans. Journal of Financial

Intermediation, 9, 404-426.

Group 2:

Anginer, D., Hrazdil, K., Li, J., and Zhang, R. (2021). Adverse Climate Incidents and Bank Loan Contracting. Available at SSRN: https://ssrn.com/abstract=3723771

Group 3:

Kim, J., and Song, B. (2011). Auditor Quality and Loan Syndicate Structure. AUDITING: A Journal of Practice & Theory, 30(4), 71-99.