Accounting Conservatism and Cost of Debt: An Empirical Test of Efficient Contracting
36 Pages Posted: 25 Apr 2000
Date Written: March 2000
This study provides evidence on the role of accounting conservatism in mitigating bondholder/shareholder conflicts over dividend policy. In particular, we document that firms that face more severe conflicts over dividend policy tend to use more conservative accounting. Furthermore, we also document that there is a tradeoff between conservatism and the cost of debt. Firms that choose more conservative accounting have a lower cost of debt after controlling for other determinants of the cost of debt. Taken together, the evidence is consistent with the notion that accounting conservatism plays an important role in efficient contracting.
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