The Changing Relevance of Accounting Information to Debt Holders over Time

We examine the change over time in the information content of accounting numbers from the perspective of bondholders and the causes for this change. Using proprietary longitudinal data, we find that, in contrast to the decline in the information content of accounting numbers to equity holders over time, the information content to bondholders has held steady or risen. The rise is attributable to economic factors such as an increase in risk and in the frequency of unfavorable news to which the valuation of debt is more sensitive than that of equity. There are indications, however, that reporting factors, specifically an increase in conservatism over the last four decades, is associated with this rise. The findings contribute to the scant literature on the use of financial information by bondholders and the extent to which financial reporting meets their unique information needs. Given debt holders prominence as users of financial statements, the findings have important implications for accounting standard setting.