Conditional Conservatism and the Yield Spread of Corporate Bond Issues
50 Pages Posted: 9 Jan 2010 Last revised: 25 Jan 2017
Date Written: November 1, 2014
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: Suggested Citation