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Conservatism and Debt

Anne Beatty
Ohio State University - Department of Accounting & Management Information Systems

Joseph Weber
Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jeff Jiewei Yu
Southern Methodist University


January 3, 2007


Abstract:     
Despite the unquestionable influence of conservatism, disagreement remains about what economic demands lead to financial reporting conservatism. Research examining lenders' demands for reporting conservatism has been questioned for ignoring conservative contract modifications. We document that these modifications exist but are not ubiquitous, and consider the relative efficiency of contract adjustments versus contracting over GAAP. We find contract modifications are more likely when agency costs are higher and litigation, tax and equity demands for conservatism are lower. However, we find a positive association between unexplained reporting conservatism and contract modifications, suggesting contractual modifications alone cannot fulfill lenders' demands for conservatism.

Keywords: Conservatism, Covenants, Debt Contracting

JEL Classifications: G21, G30, G34, G39, M41, M44, M49

Working Paper Series

Date posted: January 13, 2007 ; Last revised: September 23, 2008

Suggested Citation

Beatty, Anne L., Weber, Joseph Peter and Yu, Jeff Jiewei, Conservatism and Debt (January 3, 2007). Available at SSRN: http://ssrn.com/abstract=956367


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Contact Information

Joseph Peter Weber (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142
United States
617-253-4310 (Phone)
Anne L. Beatty
Ohio State University - Department of Accounting & Management Information Systems ( email )
2100 Neil Avenue
Columbus, OH 43210
United States

Jeff Jiewei Yu
Southern Methodist University ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-8321 (Phone)
214-768-4099 (Fax)
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