Accounting Conservatism and Bankruptcy Risk
57 Pages Posted: 6 Jun 2010 Last revised: 21 Mar 2016
Date Written: January 1, 2016
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: Suggested Citation