Abstract

http://ssrn.com/abstract=1621272
 
 

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Accounting Conservatism and Bankruptcy Risk


Gary C. Biddle


The University of Hong Kong

Jeong-Bon Kim


City University of Hong Kong

Mary L. Z. Ma


York University

Frank M. Song


The University of Hong Kong - School of Economics and Finance

April 14, 2015


Abstract:     
This study examines the relation between accounting conservatism and bankruptcy risk using a large sample of U.S listed firms from fiscal year 1989 to 2007. We present evidence that unconditional and conditional conservatism generally mitigate subsequent bankruptcy risk by creating cushions for bad times and reducing information asymmetry about bad news. We identify two channels for accounting conservatism to mitigate bankruptcy risk: enhancing cash holdings and constraining earnings management. The effect of accounting conservatism does not change for firms with extreme distress and income smoothing, but weakens for firms with debt contracts referenced by credit default swaps (CDS), consistent with CDS lowering debtholder monitoring. Results are robust to reverse causality, relations between unconditional and conditional conservatism, and alternative measures of bankruptcy risk and accounting conservatism. These findings extend research on accounting conservatism, bankruptcy risk and debt contracting, and help inform debates regarding conservatism's role as a pervasive property and long-standing tenet of financial accounting.

Number of Pages in PDF File: 55

Keywords: accounting conservatism, bankruptcy risk, unconditional conservatism, conditional conservatism

JEL Classification: M41, G32, G33


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Date posted: June 6, 2010 ; Last revised: July 14, 2015

Suggested Citation

Biddle, Gary C. and Kim, Jeong-Bon and Ma, Mary L. Z. and Song, Frank M., Accounting Conservatism and Bankruptcy Risk (April 14, 2015). Available at SSRN: http://ssrn.com/abstract=1621272 or http://dx.doi.org/10.2139/ssrn.1621272

Contact Information

Gary C. Biddle
The University of Hong Kong ( email )
1213 KK Leung Building
Pokfulam
Hong Kong
China
+852 3917-4388 (Phone)
+852 2858-5614 (Fax)
HOME PAGE: http://www.fbe.hku.hk/Aboutus/Staff_Detail.cfm?StaffID=315
Jeong-Bon Kim
City University of Hong Kong ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
China
Mary L. Z. Ma (Contact Author)
York University ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
Frank M. Song
The University of Hong Kong - School of Economics and Finance ( email )
8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
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