Evidence on the Role of Accounting Conservatism in Debt Contracting
Evidence on the Role of Accounting Conservatism in Debt Contracting

Author: Elizabeth Francisca Gutierrez

Publisher:

Published: 2012

Total Pages: 59

ISBN-13:

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I examine how accounting conservatism relates to the design of private debt contracts with consideration of managerial risk preferences embedded in compensation contracts. Theoretical explanations for conservatism relate to the design of financial covenants or valuation of pledged assets in efficiently resolving asset substitution and incentive conflicts, respectively. I also consider conservatism in earnings in conjunction with other devices in signaling credit risk. I find evidence that accounting conservatism, the presence of financial covenants, and collateral are positively associated with the choice of long-term debt; with short-term debt constituting an alternative form of creditor protection. More notably, I find evidence of a predicted positive association between the use of collateral and conservatism. I fail to find a predicted positive association, however, between the presence of financial covenants and conservatism when managerial incentives indicate greater risk of asset substitution. Finally, I find no evidence of an association between conservatism in conjunction with earnings-based covenants and yield spreads as a measure of signaling content.

Accounting Conservatism and Debt Contract Efficiency
Accounting Conservatism and Debt Contract Efficiency

Author: Xu Jiang

Publisher:

Published: 2017

Total Pages: 0

ISBN-13:

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This paper shows how accounting conservatism affects the efficiency of debt contracting in the presence of other non-accounting information. I show that conservative accounting will increase the efficiency of debt contracting when the other information is incrementally conservative to accounting information (the notion of incremental conservatism will be defined in the paper). However, when the non-accounting information is incrementally aggressive, conservative accounting is detrimental to the efficiency of debt contracting. Thus, whether more conservative financial reporting is good for debt contracting depends on the interaction between the informational characteristics of the accounting information and other non-accounting information. Interestingly, the result that the informational characteristics of the accounting system should be the same as those of the other information provides theoretical support for the conjecture proposed in prior studies (e.g., LaFond and Watts (2008)) -- that conservative accounting serves as a benchmark for other information sources that provide more informative information about gains. Although originated in the debt contracting framework, the conclusion that complementary information systems improves the efficiency of decision making is more general and can be adapted to any decision-making setting with correlated information sources.

Accounting and Debt Markets
Accounting and Debt Markets

Author: Mark Clatworthy

Publisher: Routledge

Published: 2021-05-13

Total Pages: 196

ISBN-13: 1000344665

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Accounting and Debt Markets: Four Pieces on the Role of Accounting Information in Debt Markets provides novel and up-to-date evidence on the role of accounting information in debt markets Companies and organisations worldwide rely heavily on debt markets for short, medium and long-term financing, and debt markets and financial intermediaries have significant effects on the real economy. Accounting information has various functions in debt markets, including inter alia, informing pricing decisions and credit ratings, determining the allocation of creditor control rights and establishing bank capital adequacy requirements. The chapters in this book provide illustrative discussion, analysis and evidence on the importance of accounting information in credit markets. The first of the four pieces reflects on how a conservative financial reporting system helps firms obtain debt funds and with better conditions, and why this is the case. The second examines the effects of accounting disclosure on credit ratings of private companies and shows that accounting information is useful for credit rating agencies. The two final pieces reflect on how banks should account for credit losses, and on how regulators are tackling this issue. The chapters in this book were originally published as a special issue of Accounting and Business Research.

Accounting Conservatism and Cost of Debt
Accounting Conservatism and Cost of Debt

Author: Anwer S. Ahmed

Publisher:

Published: 2001

Total Pages: 36

ISBN-13:

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This study provides evidence on the role of accounting conservatism in mitigating bondholder/shareholder conflicts over dividend policy. In particular, we document that firms that face more severe conflicts over dividend policy tend to use more conservative accounting. Furthermore, we also document that there is a tradeoff between conservatism and the cost of debt. Firms that choose more conservative accounting have a lower cost of debt after controlling for other determinants of the cost of debt. Taken together, the evidence is consistent with the notion that accounting conservatism plays an important role in efficient contracting.

Accounting Conservatism and Long-term Debt Contracts
Accounting Conservatism and Long-term Debt Contracts

Author: Aikaterini Ferentinou

Publisher:

Published: 2018

Total Pages:

ISBN-13:

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The purpose of this thesis is to examine the effect of a number of debt issue characteristics on debt contracting efficiency. After the initiation of a debt contract, inefficiencies can arise due to incomplete contracts and agency costs. I contribute to understanding whether debt maturity, different types of accounting-based (balance-sheet- and income-statement-based) debt covenants, as well as ability of renegotiation can restore efficiency. The research is motivated by the fact that there is an inconsistency in empirical and analytical results regarding the role of conservatism (beneficial or not) in the debt contracting setting. A reason for this inconsistency may well be the consideration of debt maturity. Previous analytical literature studies short-term debt contracts, while inefficiencies in the form of increased agency costs exist in case of longer debt maturity. Furthermore, analytical research does not examine balance-sheet debt covenants, although they also improve debt efficiency. My analytical show that there is a higher level of conservatism, when the long-term debt contracts include balance-sheet rather than income-statement debt covenants. Moreover, a higher level of conservatism is required under long-term than under short-term debt contracts, given that the conflict of interest between the firm and the lender is strong. My empirical findings provide empirical evidence in accordance with my analytical findings, while I also find that long-term (short-term) debt contracts include more (less) balance-sheet than income-statement debt covenants. Finally, I find that when renegotiation is an option, the intensiveness of the conflict of interest, the probability that the project is good, along with the level of renegotiation cost will determine the optimal level of conservatism. As the renegotiation cost increases, the result becomes more liberal, under a moderate conflict of interest and more conservative, under a strong conflict of interest.

Accounting Conservatism and Firm Growth Financed by External Debt
Accounting Conservatism and Firm Growth Financed by External Debt

Author: Tony Kang

Publisher:

Published: 2015

Total Pages: 45

ISBN-13:

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Previous research shows that accounting conservatism facilitates debt contracting. Extending this line of literature, we examine whether the role of accounting conservatism in accessing external debt to attain firm growth varies with its maturity. We find evidence of a positive relationship between conservatism and debt maturity. We also observe a positive relationship between conservative accounting and future growth funded by all classes of debt, but this relation is due to long-term rather than short-term debt, which is less prone to agency risk. Further, the associations between conservatism and debt maturity and conservatism and growth financed by long-term debt are mostly observed for firms with fewer anti-takeover provisions in place. These findings suggest that the demand for accounting conservatism is not uniform across different debt maturity horizons.

Accounting Conservatism and Debt Contract
Accounting Conservatism and Debt Contract

Author: Jing Li

Publisher:

Published: 2010

Total Pages: 34

ISBN-13:

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His paper develops a theoretical model to understand the role of accounting conservatism in debt contracts, incorporating the possible renegotiation of debt contracts with accounting-based covenants. I find that the demand for accounting conservatism depends on whether renegotiation occurs and if so, at what cost. When the covenant is not renegotiable or when renegotiation cost is sufficiently high, more conservative accounting actually reduces the efficiency of debt contracts. When renegotiation cost is moderate, more conservative accounting may increase the entrepreneur's welfare under certain conditions, especially for firms with less promising investment opportunities and for firms with higher liquidation values. Both are characteristics of ``traditional industriesquot; characterized by low growth and high level of tangible assets in place. When renegotiation is costless, the degree of accounting conservatism becomes irrelevant and the first best liquidation is always achieved. These results call for more cross-sectional examinations on the role of accounting conservatism in debt contracts in empirical studies.

Accounting Conservatism and Managerial Information Acquisition
Accounting Conservatism and Managerial Information Acquisition

Author: Christian Laux

Publisher:

Published: 2020

Total Pages: 37

ISBN-13:

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We study the interaction between strategic managerial information acquisition and shareholders' optimal degree of conservative accounting. Conservative accounting results in more frequent early warnings that allow lenders or corporate boards to take corrective actions, but also increases the risk of false alarms and excessive interventions. Managers' ability to gather additional evidence changes this trade-off because managers have an intrinsic incentive to obtain and disclose evidence that prevents intervention. Managers' incentives to refute low accounting reports, but not high reports, reduces the negative consequences of conservative reporting without altering its benefits. In addition, conservatism increases the likelihood that managers find favorable evidence after an early warning and hence induces greater effort in gathering evidence. Our model provides a novel explanation for the empirical observations that conservatism plays a positive role in debt contracts and that covenant violations frequently trigger debt contract renegotiation and covenant waivers.