Accounting Conservatism and Bankruptcy Risk
Gary C. Biddle
The University of Hong Kong
Mary L. Ma
Frank M. Song
The University of Hong Kong - School of Economics and Finance
October 7, 2013
This study presents evidence that unconditional and conditional conservatism help mitigate subsequent bankruptcy risk by enhancing cash, constraining earnings management, and lowering leverage. Our results are robust to income smoothing, extreme distress, reverse causality, relations between unconditional and conditional conservatism, and alternative measures of bankruptcy risk and conservatism. These findings extend research on accounting conservatism and bankruptcy risk, and help inform continuing debates regarding conservatism’s role as a pervasive property and longstanding tenet of financial accounting.
Keywords: accounting conservatism, bankruptcy risk, unconditional conservatism, conditional conservatism
JEL Classification: M41, G32, G33
Date posted: June 6, 2010 ; Last revised: January 13, 2015
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