Conservatism and Debt
Posted: 23 Jun 2008
Date Written: June 22, 2008
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. 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.
JEL Classification: G21, G32, G34, M41, M44, M45
Suggested Citation: Suggested Citation