Debtholders' Demand for Conservatism: Evidence from Changes in Directors' Fiduciary Duties

49 Pages Posted: 2 May 2012 Last revised: 20 Sep 2014

See all articles by JK Aier

JK Aier

George Mason University

Long Chen

George Mason University - Department of Accounting

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Date Written: August 31, 2014

Abstract

Debtholders’ demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. Additionally, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders’ demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders’ demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of board of directors in financial reporting.

Keywords: Conservatism, fiduciary duties, near insolvency, board governance

JEL Classification: M40, M41

Suggested Citation

Aier, Jagadison K and Chen, Long and Pevzner, Mikhail, Debtholders' Demand for Conservatism: Evidence from Changes in Directors' Fiduciary Duties (August 31, 2014). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2049319 or http://dx.doi.org/10.2139/ssrn.2049319

Jagadison K Aier

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

Long Chen (Contact Author)

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

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