The Role of Accounting Conservatism in Capital Structure Adjustments

41 Pages Posted: 10 Dec 2018

See all articles by Santhosh Ramalingegowda

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Yong Yu

University of Texas at Austin

Date Written: November 15, 2018

Abstract

This study examines the relation between accounting conservatism and firms’ capital structure adjustments. We find that firms with more conservative financial reporting adjust their capital structure toward the target more quickly, especially within firms that rely more on external financing for adjustments. Further, we find that the positive effect of conservatism on adjustment speeds is concentrated in under-levered firms and this effect occurs through conservatism facilitating debt issuance. Additionally, we show that higher conservatism is associated with higher future profitability for under-levered firms. Taken together, our findings suggest that accounting conservatism plays an important role in facilitating under-levered firms’ adjustment of capital structure toward the target.

Keywords: conservatism, capital structure, adjustment speed, under-levered firms, over-levered firms

JEL Classification: G20, M41, M43

Suggested Citation

Ramalingegowda, Santhosh and Yu, Yong, The Role of Accounting Conservatism in Capital Structure Adjustments (November 15, 2018). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3285445

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

Yong Yu (Contact Author)

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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