Accounting Conservatism and Creditor Recovery Rate

55 Pages Posted: 24 Jan 2013 Last revised: 24 Dec 2014

See all articles by John Donovan

John Donovan

University of Notre Dame - Department of Accountancy

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Date Written: December 14, 2014

Abstract

We examine the relation between accounting conservatism and creditor recovery rates for firms in default. We also test the link between conservatism and the length of distress resolution proceedings. We find creditors of firms with more conservative accounting prior to default have significantly higher recovery rates and shorter duration of bankruptcy resolution. Moreover, conservative firms are more likely to violate debt covenants prior to default and more timely to enter bankruptcy proceedings after large negative shocks. Last, conservative firms show a significantly higher probability of emerging from bankruptcy. These results suggest accounting conservatism preserves creditor value conditional on default.

Keywords: accounting conservatism, recovery rate, bankruptcy resolution, covenant violation

JEL Classification: M40, G32, G33, G34

Suggested Citation

Donovan, John and Frankel, Richard M. and Martin, Xiumin, Accounting Conservatism and Creditor Recovery Rate (December 14, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2205968 or http://dx.doi.org/10.2139/ssrn.2205968

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

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