Accounting Conservatism and Bankruptcy Risk

57 Pages Posted: 6 Jun 2010 Last revised: 21 Mar 2016

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia University - Columbia Business School; London Business School; University of Melbourne; The University of Hong Kong

Mary L. Z. Ma

York University

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Date Written: January 1, 2016

Abstract

This study examines the relation between accounting conservatism and bankruptcy risk using a large sample of U.S listed firms. We present evidence that unconditional and conditional conservatism generally are negatively associated with subsequent bankruptcy risk by creating cushions for bad times and reducing information asymmetry between borrower firms and debtholders. We identify two channels for the observed associations: Enhancing cash holdings and constraining earnings management. Using a two-stage analysis approach and using Sarbanes-Oxley Act (SOX) enactment in 2002 as exogenous shocks, we show that accounting conservatism does have a mitigating effect on bankruptcy risk.

Keywords: bankruptcy risk; unconditional conservatism; conditional conservatism

JEL Classification: M41, G32, G33

Suggested Citation

Biddle, Gary C. and Ma, Mary L. Z. and Song, Frank M., Accounting Conservatism and Bankruptcy Risk (January 1, 2016). Available at SSRN: https://ssrn.com/abstract=1621272 or http://dx.doi.org/10.2139/ssrn.1621272

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, 198 Berkeley Street
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Melbourne, Victoria 3010
Australia
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Columbia University - Columbia Business School ( email )

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London Business School ( email )

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University of Melbourne ( email )

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Australia
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The University of Hong Kong ( email )

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Mary L. Z. Ma (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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