Abstract

http://ssrn.com/abstract=2038363
 
 

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Creditor Control Rights and Financial Reporting Conservatism


Cong Wang


The Chinese University of Hong Kong (CUHK) - Department of Finance

Fei Xie


Clemson University

Xiangang Xin


City University of Hong Kong

May 1, 2011


Abstract:     
Covenant violations transfer control rights from shareholders/managers to creditors and provide a clear mechanism through which creditors can impose their preference on corporate financial reporting policies. Consistent with creditors using their control rights to demand more conservative financial reporting, we find significant evidence that firms exhibit a higher level of accounting conservatism after covenant violations. Results from quasi-discontinuity regressions show that the effect of covenant violations on accounting conservatism is beyond that of deteriorating firm performance that triggers covenant violations. In addition, the post-violation increase in accounting conservatism is more pronounced in firms with higher expected agency costs of debt and firms experiencing more severe violations, and is more evident in the years immediately following covenant violations. Our findings provide direct support for debtholder demand for accounting conservatism (Watts (2003)) and highlight the importance of creditor control rights and shareholder-debtholder conflicts in shaping corporate financial reporting policies.

Number of Pages in PDF File: 54

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Date posted: April 11, 2012  

Suggested Citation

Wang, Cong and Xie, Fei and Xin, Xiangang, Creditor Control Rights and Financial Reporting Conservatism (May 1, 2011). Available at SSRN: http://ssrn.com/abstract=2038363 or http://dx.doi.org/10.2139/ssrn.2038363

Contact Information

Cong Wang
The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )
Shatin, N.T.
Hong Kong
(852)26961913 (Phone)
(852)26036586 (Fax)
Fei Xie (Contact Author)
Clemson University ( email )
101 Sikes Ave
Clemson, SC 29634
United States
(864) 656-0774 (Phone)
Xiangang Xin
City University of Hong Kong ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
Hong Kong
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