Download or read book Accounting Conservatism and the Consequences of Covenant Violations written by Yutao Li and published by . This book was released on 2011 with total page 161 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent studies document that covenant violations intensify the conflicts of interest between lenders and borrowers, and lead to greater restrictions on borrowing firms' financing and investment activities (Chava and Roberts, 2008; Roberts and Sufi, 2009b). Motivated by this literature, I investigate whether accounting conservatism, specifically conditional conservatism, mitigates the adverse consequences of debt covenant violations. I argue that conservative reporting can potentially ameliorate the conflicts of interest between lenders and borrowers. Therefore, I predict that accounting conservatism reduces the adverse impact of covenant violations on borrowers' financing and investing activities and exhibits a positive association with operating and stock market performance after covenant violations. I obtain a sample of 312 violating and 5,327 non-violating firm-quarters observations from U.S. non-financial public firms during the period of 1998 - 2007 to test my hypotheses. Using three measures of conditional conservatism and a composite measure of the three individual measures, I find that the degree of increase in borrowing firms' conservative reporting between loan initiation and covenant violation is associated with smaller reductions in firms' financing and investing activities in the post-violation period. Furthermore, my analyses provide some evidence that firms that increase conservative reporting exhibit better stock market performance, implying that conservative reporting is beneficial for shareholders after covenant violations. I find no evidence that increased accounting conservatism affects operating performance after covenant violations. My results continue to hold after controlling for pre-contracting unconditional and conditional conservatism. Overall, my dissertation provides evidence that conservative accounting practices followed by borrowing firms ease the adverse consequences of debt covenant violations. My dissertation contributes to the emerging literature on the effects of accounting quality on re-contracting outcomes after covenant violations.

Download or read book Accounting Conservatism and Managerial Information Acquisition written by Christian Laux and published by . This book was released on 2020 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Accounting Conservatism and the Cost of Capital written by Li, Xi and published by . This book was released on 2015 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further explore the cross-sectional variation of the above relations. I find that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. I also find that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.

Download or read book Essays on Accounting Conservatism written by Bong Hwan Kim and published by . This book was released on 2010 with total page 157 pages. Available in PDF, EPUB and Kindle. Book excerpt: I examine the role of accounting conservatism in the debt market and equity market. In the first essay I examine whether post-borrowing accounting conservatism is related to initial debt-covenant slack. I find firms with low debt-covenant slack display a smaller increase in conservatism after borrowing compared to firms with high debt-covenant slack. I further find that this relation is more pronounced when the cost of debt-covenant breach is greater and is less pronounced when lenders have stronger monitoring incentives. This study supports the debt covenant hypothesis. The second essay investigates the impact of financial market competition on a firm's choice regarding accounting quality (co-authored). The estimates indicate that foreign bank entry is associated with improved accounting quality among firms, and this improvement is positively related to a firm's subsequent debt level. The increase in accounting quality is also greatest among private firms, smaller firms, less profitable firms, and firms more dependent on external financing. The third essay investigates whether conditional accounting conservatism has informational benefits to shareholders (co-authored). We find some evidence that higher current conditional conservatism is associated with lower probability of future bad news. We also find weak evidence that the stock market reacts stronger (weaker) to good (bad) earnings news of more conditionally conservative firms. Thus, we provide additional evidence that conditional conservatism affects stock prices.

Download or read book Accounting Conservatism and Debt Contract written by Jing Li and published by . This book was released on 2010 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Accounting Conservatism and Creditor Recovery Rate written by John Donovan and published by . This book was released on 2014 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relation between accounting conservatism and creditor recovery rates for firms in default. We also test the link between conservatism and the length of distress resolution proceedings. We find creditors of firms with more conservative accounting prior to default have significantly higher recovery rates and shorter duration of bankruptcy resolution. Moreover, conservative firms are more likely to violate debt covenants prior to default and more timely to enter bankruptcy proceedings after large negative shocks. Last, conservative firms show a significantly higher probability of emerging from bankruptcy. These results suggest accounting conservatism preserves creditor value conditional on default.

Download or read book The Effect of Debt Covenant Violation on Managerial Accrual based Accounting Choices written by Khaled Mohamed Omer Aljifri and published by . This book was released on 2000 with total page 287 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Conditional and Unconditional Conservatism written by Julia Nasev and published by Springer Science & Business Media. This book was released on 2009-12-28 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Julia Nasev examines the impact of conservative accounting numbers on valuation estimates and on real economic decisions such as cost stickiness.

Download or read book Accounting Conservatism and the Stock Market written by Carlo D’Augusta and published by Springer Nature. This book was released on with total page 89 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Accounting Conservatism and Creditor Conflicts written by Jochen Bigus and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a model showing that accounting conservatism affects creditor coordination when the borrowing firm is in financial distress. There are two effects. First, accounting conservatism tends to reduce dividend payments and to keep assets within the firm (dividend restriction effect). Second, it biases expectations of financial distress (information bias effect). In financial distress, the dividend restriction effect may induce a costly prisoner's dilemma situation in which some creditors are tempted to call a loan before other creditors do so. This dilemma occurs when there are sufficient assets, i.e. when accounting conservatism is sufficiently strong. The information bias effect makes the prisoner's dilemma less likely to occur, since creditors cannot be sure that a “bad” financial report implies financial distress. The latter result suggests that conservative accounting might be desirable in the banking industry where inefficient creditor coordination (bank run) is more likely and its costs are quite substantial. Accounting conservatism may also be beneficial in the sense that the threat of a prisoner's dilemma provides stronger incentives to the debtor to avoid financial distress. The model explains why we observe more accounting conservatism with private debt than with public debt and why informed creditors receive more collateral.

Download or read book The Effects of Accounting Conservatism on Financial Statements and Financial Statement Users written by George W. Ruch and published by . This book was released on 2014 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We review and analyze the accounting literature that examines the effects of accounting conservatism on financial statements and financial statement users. We begin by analyzing how conservatism affects the reported numbers on the financial statements. These studies primarily evaluate how conservatism affects earnings quality, including earnings persistence and the presence of earnings management. Next, we assess the effect of accounting conservatism on the users of the financial statements. We identify three primary users of the financial statements: (1) equity market users (2) debt market users and (3) corporate governance users. Within each of these categories we analyze the findings of prior research and explore unanswered research questions. By analyzing the effects of accounting conservatism from a diverse range of research topics, we inform the discussion on the costs and benefits of accounting conservatism.

Download or read book Accounting and Debt Markets written by Mark Clatworthy and published by Routledge. This book was released on 2021-05-13 with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Economic Consequences of Accounting Conservatism written by Lizhi Ma and published by . This book was released on 2011 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Determinants and Economic Consequences of Discretionary Accounting Conservatism written by Yen H. Tong and published by . This book was released on 2005 with total page 210 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Accounting Conservatism and the Efficiency of Debt Contracts written by Frank Gigler and published by . This book was released on 2011 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using the debt contracting framework in Gigler et al. [2009], this paper examines the efficiency implication of accounting conservatism in the sense of timelier loss recognition. I characterize conservatism as timelier recognition of economic losses than gains for one component of the accounting signal, assuming the debt covenant is written on the whole signal reported. I show two main results. First, although information contents of accounting regimes with different timeliness in gains and losses recognition are not comparable in the Blackwell sense under my characterization of accounting regimes, the contracting efficiency always increases with timeliness in gain and loss recognition. Second, although it is true that bad news is more useful than good news for debt contracting, it is not sufficient to justify that economic losses are more useful than gains on one component of the accounting signal. My findings imply that conservatism increases the efficiency of debt contracts when the timeliness in gains recognition is fixed, which is inconsistent with the conclusions in Gigler et al. [2009].

Download or read book Accounting Conservatism Cost of Capital and Fraudulent Financial Reporting written by Karin A. Petruska and published by . This book was released on 2008 with total page 274 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting conservatism is often described as an equilibrium reaction used to moderate a decrease in value resulting from information asymmetry, uncertainty, or private information that occurs between investors and managers (LaFond and Watts, 2008). Although a qualitative characteristic of the FASB conceptual framework, standard setters have addressed concerns that accounting conservatism may lack neutrality and can lead to biased firm reporting that misrepresents economic conditions. Based on the theoretical framework of litigation proposed by Watts (2003), I address whether firms with higher thresholds of litigation risk are inclined to use higher levels of asymmetric timeliness as a choice in reducing information asymmetry. The motivation for this study is to extend the concept of accounting conservatism to a setting that investigates firms with egregious levels of litigation risk to determine if they exhibit higher levels of accounting conservatism. In terms of regulation, the Sarbanes-Oxley Act was enacted to increase transparency and disclosure in financial reporting and represents a more transparent shift in the information environment. I examine whether the asymmetric timeliness of earnings and firm-specific measures of accounting conservatism are more pronounced for alleged fraud firms in the post-SOX period, when litigation risk is expected to increase. In terms of standard setting, I examine if goodwill impairment is higher for firms accused of alleged fraudulent activity and whether these firms utilizing goodwill impairment maintain a higher degree of accounting conservatism. I investigate whether accounting conservatism, as a disclosure mechanism, can mitigate an increase in the cost of equity capital, even under the auspices of alleged fraud. Additionally, this study addresses the issue of whether there are contagion effects of asymmetric timeliness for firms in similar industries as the alleged fraud firms. The results suggest that the threat of litigation for alleged fraud firms invokes a higher degree of asymmetric timeliness surrounding the alleged fraud manipulation date in the financial statements vis-á-vis a control sample and is driven by the accrual component of earnings. The degree of asymmetric timeliness of earnings remains higher in the post-SOX period for alleged fraud firms. However, the relation between firm-specific measures of accounting conservatism and the post-SOX period vary depending on the measure used. Goodwill impairment is higher for firms accused of alleged fraudulent activity and the asymmetric timeliness of earnings is greater for alleged fraud firms that utilize goodwill impairment. The relation between accounting conservatism and the cost of equity capital varies as to the measure used to construct the cost of equity capital. This suggests that firms are not able to influence the cost of equity capital through a more conservative disclosure policy. Also, there do not appear to be industry contagion effects. The findings lend support as to the role of accounting conservatism and why the FASB should continue to monitor its increasing effects. The results can provide support to investors, analysts, and academicians in adjusting for the effects of conservatism and to auditors in understanding how accounting conservatism could be used by firms and the multiple ways that it can be measured.

Download or read book Accounting Rules for Debt Covenants written by Mr. Moritz Karl Walter Hiemann and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis examines the properties of accounting rules designed to maximize the efficiency of accounting-based debt covenants in a setting with incomplete contracts and asset substitution. Accounting takes the role of a state-contingent decision facilitator by inducing covenant violations, and hence a transfer of decision rights from the borrowing firm to the lender, whenever the lender has less detrimental decision incentives than the firm. This representation of accounting is distinctive in two respects. First, accounting does not have to enlarge the contracting parties' information sets but is nonetheless valuable because it provides verifiable information and hence improves contract efficiency. Second, accounting is an endogenously chosen information aggregation rule rather than an information signal with exogenous properties. The optimal accounting rule in this setting is a function of cash flows and fair value estimates and implements a debt contract with a unique optimal tradeoff between decision rights and interest rates. The optimal degree of conservatism of this accounting rule, measured as the tendency to yield low accounting measures and hence more frequent covenant violations, is higher for firms with high leverage, low profitability, and high liquidation values. Firm value is a convex function of financial leverage in this setting.