Conditional Conservatism and the Yield Spread of Corporate Bond Issues

50 Pages Posted: 9 Jan 2010 Last revised: 25 Jan 2017

See all articles by Mingzhi Liu

Mingzhi Liu

University of Manitoba - Asper School of Business

Michel Magnan

Concordia University - Department of Accountancy

Date Written: November 1, 2014

Abstract

Building upon recent research which indicates that debt markets rather than equity markets shape financial reporting, this study examines how conditionally conservative financial reporting relates to the yield spread of corporate bond issues. Our findings suggest that the debt contract efficiency/information costs view of conditional conservatism, documented in private debt contracts, does not generalize to public debt contracts. Instead, a debt contract renegotiation costs perspective seems to better capture the dynamics of the public debt markets, with conditionally conservative reporting being associated with higher yield spread of corporate bond issues. Additional subsample test results indicate that the association between conditional conservatism and bond yield spreads is more pronounced in non-investment grade bonds, for bond issuers with more financial distress, and for bonds that are issued before the passage of the Sarbanes–Oxley Act. This study fills a gap in the conservatism literature, which focuses primarily on equity or private bank loan markets with traditional debt contract efficiency/information costs view.

Keywords: Conditional conservatism; Yield spread; Debt contract efficiency; Information costs; Debt contract renegotiation costs

JEL Classification: M41

Suggested Citation

Liu, Mingzhi and Magnan, Michel, Conditional Conservatism and the Yield Spread of Corporate Bond Issues (November 1, 2014). Review of Quantitative Finance and Accounting, Vol 46, No 4, 2016. Available at SSRN: https://ssrn.com/abstract=1531955 or http://dx.doi.org/10.2139/ssrn.1531955

Mingzhi Liu (Contact Author)

University of Manitoba - Asper School of Business ( email )

460-181 Freedman Crescent
Winnipeg, Manitoba R3T 5V5
Canada
204-474-6847 (Phone)

HOME PAGE: http://umanitoba.ca/faculties/management/faculty_staff/academic_professors/mingzhi-liu.html

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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