Contracting and Reporting Conservatism around a Change in Fiduciary Duties

Posted: 28 May 2020

See all articles by Daniel A. Bens

Daniel A. Bens

INSEAD

Sterling Huang

Singapore Management University - School of Accountancy

Liang Tan

Virginia Polytechnic Institute & State University

Wan Wongsunwai

The Chinese University of Hong Kong (CUHK)

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2020

Abstract

We exploit an influential 1991 Delaware court ruling to examine simultaneously two types of conservatism that play important roles in resolving creditor-owner agency conflicts: contracting conservatism and reporting conservatism. The ruling expanded managerial fiduciary duties in favor of creditors for Delaware-incorporated firms in the vicinity of insolvency. In those firms, following the ruling, debt contracts are less likely to include conservative adjustments to accounting numbers used for covenant compliance (i.e., contracting conservatism decreases), while public financial reporting becomes more conservative (i.e., reporting conservatism increases). The decrease in contracting conservatism is concentrated in firms that exhibit a greater increase in reporting conservatism, suggesting that reporting conservatism is more cost effective in resolving agency conflicts. In addition, the substitution effect is more pronounced in firms facing greater business uncertainty and firms with greater board independence.

Keywords: contracting conservatism, reporting conservatism, debt contracting, fiduciary duties, corporate governance

JEL Classification: G3, L2, M1

Suggested Citation

Bens, Daniel A. and Huang, Sterling and Tan, Liang and Wongsunwai, Wan, Contracting and Reporting Conservatism around a Change in Fiduciary Duties (March 31, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3588500

Daniel A. Bens

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Sterling Huang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
6808 7929 (Phone)

Liang Tan

Virginia Polytechnic Institute & State University ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

HOME PAGE: http://https://acis.pamplin.vt.edu/directory/tan.html

Wan Wongsunwai (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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