Agency-Based Demand for Conservatism: Evidence from State Adoption of Antitakeover Laws

56 Pages Posted: 28 Oct 2011

See all articles by Sudarshan Jayaraman

Sudarshan Jayaraman

University of Rochester - Simon Business School; Simon Business School, University of Rochester

Lakshmanan Shivakumar

London Business School

Date Written: October 27, 2011

Abstract

We use antitakeover laws passed by several states in the mid-1980s and early 1990s as an exogenous increase in agency conflicts, and examine how these laws affect the demand for asymmetric timeliness of loss recognition (ATLR). Consistent with the debt-based contracting demand for ATLR, we find an increase in ATLR after the assuage of antitakeover laws for firms with high contracting pressures. These increases are incremental to those found in control firms that face similar pressures but whose states did not pass antitakeover laws. We do not find comparable changes in ATLR for firms with higher agency costs of equity. In contrast to the observed increases in ATLR, we find no change in the short-window information content of earnings announcements. Overall, our results suggest that higher agency conflicts result in a heightened demand for ATLR in financial statements but not for more forward-looking new information. Further, these demands seem to emanate from debtholders and not from equityholders.

Keywords: Conservatism, anti-takeover, timely loss recognition, agency conflicts

JEL Classification: M41

Suggested Citation

Jayaraman, Sudarshan and Jayaraman, Sudarshan and Shivakumar, Lakshmanan, Agency-Based Demand for Conservatism: Evidence from State Adoption of Antitakeover Laws (October 27, 2011). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1950236

Sudarshan Jayaraman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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