Conservatism and Debt

49 Pages Posted: 13 Jan 2007 Last revised: 23 Sep 2008

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jeff Jiewei Yu

University of Arizona

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2007

Abstract

Despite the unquestionable influence of conservatism, disagreement remains about what economic demands lead to financial reporting conservatism. Research examining lenders' demands for reporting conservatism has been questioned for ignoring conservative contract modifications. We document that these modifications exist but are not ubiquitous, and consider the relative efficiency of contract adjustments versus contracting over GAAP. We find contract modifications are more likely when agency costs are higher and litigation, tax and equity demands for conservatism are lower. However, we find a positive association between unexplained reporting conservatism and contract modifications, suggesting contractual modifications alone cannot fulfill lenders' demands for conservatism.

Keywords: Conservatism, Covenants, Debt Contracting

JEL Classification: G21, G30, G34, G39, M41, M44, M49

Suggested Citation

Beatty, Anne L. and Weber, Joseph Peter and Yu, Jeff Jiewei, Conservatism and Debt (January 3, 2007). Available at SSRN: https://ssrn.com/abstract=956367 or http://dx.doi.org/10.2139/ssrn.956367

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Joseph Peter Weber (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

Jeff Jiewei Yu

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States
520-621-1273 (Phone)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/jeff-jiewei-yu

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