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Risky Debt, Mixed-Attribute Accounting, and the Identification of Conditional Conservatism

60 Pages Posted: 24 Sep 2009  

William H. Beaver

Stanford University

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Date Written: September 23, 2009

Abstract

We examine the implications of the presence of risky debt-which embeds an economic written put option on the firm (Merton 1974)-and mixed-attribute accounting for assets versus debt-an accounting option exercisable by accounting standard setters and/or firms preparing financial statements-for the empirical identification of conditional conservatism as asymmetry. We first conduct analytical and simulation analyses to develop a rich set of testable hypotheses about the effects of these two options on asymmetry. We then conduct archival empirical analysis to show that researchers can control for the riskiness of debt using measures of economic leverage, equity return volatility, and debt credit ratings. In this analysis we control for a measure of the percentage of economic assets that are recognized for accounting purposes and so are potentially subject to conditional conservatism. We find that, after controlling for declines in economic leverage and the asset recognition percentage over time, the upward trend in asymmetry is stronger and more monotonic than is the upward trend in the asymmetry for the overall sample that Basu (1997) documents.

Keywords: risky debt, mixed-attribute accounting, conditional conservatism, asymmetry

JEL Classification: M41

Suggested Citation

Beaver, William H. and Ryan, Stephen G., Risky Debt, Mixed-Attribute Accounting, and the Identification of Conditional Conservatism (September 23, 2009). Available at SSRN: https://ssrn.com/abstract=1477528 or http://dx.doi.org/10.2139/ssrn.1477528

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Stephen G. Ryan (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

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