Accounting Conservatism and Creditor Recovery Rate
55 Pages Posted: 24 Jan 2013 Last revised: 24 Dec 2014
Date Written: December 14, 2014
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
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