Accounting Conservatism And Debt Contract Efficiency With Soft Information
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Accounting Conservatism and Debt Contract Efficiency
| Author | : Xu Jiang |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
This paper shows how accounting conservatism affects the efficiency of debt contracting in the presence of other non-accounting information. I show that conservative accounting will increase the efficiency of debt contracting when the other information is incrementally conservative to accounting information (the notion of incremental conservatism will be defined in the paper). However, when the non-accounting information is incrementally aggressive, conservative accounting is detrimental to the efficiency of debt contracting. Thus, whether more conservative financial reporting is good for debt contracting depends on the interaction between the informational characteristics of the accounting information and other non-accounting information. Interestingly, the result that the informational characteristics of the accounting system should be the same as those of the other information provides theoretical support for the conjecture proposed in prior studies (e.g., LaFond and Watts (2008)) -- that conservative accounting serves as a benchmark for other information sources that provide more informative information about gains. Although originated in the debt contracting framework, the conclusion that complementary information systems improves the efficiency of decision making is more general and can be adapted to any decision-making setting with correlated information sources.
Accounting Conservatism and the Efficiency of Debt Contracts
| Author | : Frank Gigler |
| Publisher | : |
| Total Pages | : 54 |
| Release | : 2011 |
| Genre | : |
| ISBN | : |
Using the debt contracting framework in Gigler et al. [2009], this paper examines the efficiency implication of accounting conservatism in the sense of timelier loss recognition. I characterize conservatism as timelier recognition of economic losses than gains for one component of the accounting signal, assuming the debt covenant is written on the whole signal reported. I show two main results. First, although information contents of accounting regimes with different timeliness in gains and losses recognition are not comparable in the Blackwell sense under my characterization of accounting regimes, the contracting efficiency always increases with timeliness in gain and loss recognition. Second, although it is true that bad news is more useful than good news for debt contracting, it is not sufficient to justify that economic losses are more useful than gains on one component of the accounting signal. My findings imply that conservatism increases the efficiency of debt contracts when the timeliness in gains recognition is fixed, which is inconsistent with the conclusions in Gigler et al. [2009].
Accounting Conservatism and Debt Contract
| Author | : Jing Li |
| Publisher | : |
| Total Pages | : 34 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
His paper develops a theoretical model to understand the role of accounting conservatism in debt contracts, incorporating the possible renegotiation of debt contracts with accounting-based covenants. I find that the demand for accounting conservatism depends on whether renegotiation occurs and if so, at what cost. When the covenant is not renegotiable or when renegotiation cost is sufficiently high, more conservative accounting actually reduces the efficiency of debt contracts. When renegotiation cost is moderate, more conservative accounting may increase the entrepreneur's welfare under certain conditions, especially for firms with less promising investment opportunities and for firms with higher liquidation values. Both are characteristics of ``traditional industriesquot; characterized by low growth and high level of tangible assets in place. When renegotiation is costless, the degree of accounting conservatism becomes irrelevant and the first best liquidation is always achieved. These results call for more cross-sectional examinations on the role of accounting conservatism in debt contracts in empirical studies.
Accounting Conservatism and the Efficiency of Debt Contracts
| Author | : Frank Gigler |
| Publisher | : |
| Total Pages | : 54 |
| Release | : 2009 |
| Genre | : |
| ISBN | : |
In this paper we examine how accounting conservatism affects the efficiency of debt contracting. We develop the statistical and informational properties of accounting reports under varying degrees of conditional and unconditional accounting conservatism, consistent with Basu's [1987] description of differential verifiability standards. Optimal debt covenants and interest rates on debt are derived from a natural tension between debt holders and equity claimants. We show how optimal covenants vary with the degree of conservatism and we derive an efficiency metric that depends on the degree of conservatism. We find that accounting conservatism actually decreases the efficiency of debt contracts, contrary to the suggestions of Watts [2003] and contrary to the hypothesis in numerous empirical studies.
Accounting Conservatism, Debt Contracts and Financial Institutions
| Author | : |
| Publisher | : |
| Total Pages | : |
| Release | : 2006 |
| Genre | : |
| ISBN | : |
Accounting conservatism, debt contracts and financial institutions.
Accounting Conservatism and the Cost of Capital
| Author | : Li, Xi |
| Publisher | : |
| Total Pages | : 43 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further explore the cross-sectional variation of the above relations. I find that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. I also find that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.
Accounting Conservatism and Managerial Information Acquisition
| Author | : Christian Laux |
| Publisher | : |
| Total Pages | : 37 |
| Release | : 2020 |
| Genre | : |
| ISBN | : |
We study the interaction between strategic managerial information acquisition and shareholders' optimal degree of conservative accounting. Conservative accounting results in more frequent early warnings that allow lenders or corporate boards to take corrective actions, but also increases the risk of false alarms and excessive interventions. Managers' ability to gather additional evidence changes this trade-off because managers have an intrinsic incentive to obtain and disclose evidence that prevents intervention. Managers' incentives to refute low accounting reports, but not high reports, reduces the negative consequences of conservative reporting without altering its benefits. In addition, conservatism increases the likelihood that managers find favorable evidence after an early warning and hence induces greater effort in gathering evidence. Our model provides a novel explanation for the empirical observations that conservatism plays a positive role in debt contracts and that covenant violations frequently trigger debt contract renegotiation and covenant waivers.
Accounting and Debt Markets
| Author | : Mark Clatworthy |
| Publisher | : Routledge |
| Total Pages | : 196 |
| Release | : 2021-05-13 |
| Genre | : Business & Economics |
| ISBN | : 1000344665 |
Accounting and Debt Markets: Four Pieces on the Role of Accounting Information in Debt Markets provides novel and up-to-date evidence on the role of accounting information in debt markets Companies and organisations worldwide rely heavily on debt markets for short, medium and long-term financing, and debt markets and financial intermediaries have significant effects on the real economy. Accounting information has various functions in debt markets, including inter alia, informing pricing decisions and credit ratings, determining the allocation of creditor control rights and establishing bank capital adequacy requirements. The chapters in this book provide illustrative discussion, analysis and evidence on the importance of accounting information in credit markets. The first of the four pieces reflects on how a conservative financial reporting system helps firms obtain debt funds and with better conditions, and why this is the case. The second examines the effects of accounting disclosure on credit ratings of private companies and shows that accounting information is useful for credit rating agencies. The two final pieces reflect on how banks should account for credit losses, and on how regulators are tackling this issue. The chapters in this book were originally published as a special issue of Accounting and Business Research.
