Accounting Conservatism and the Efficiency of Debt Contracts

Frank Gigler, Chandra Kanodia, Haresh Sapra and Raghu Venugopalan

Journal of Accounting Research, 2009, vol. 47, issue 3, pages 767-797

Abstract: ABSTRACTIn 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 [1997] 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 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. Copyright (c), University of Chicago on behalf of the Institute of Professional Accounting, 2009.

Date: 2009
View citations in EconPapers

Downloads: (external link)
http://www.blackwell-synergy.com/servlet/useragent ... &year=2009&part=null link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:joares:v:47:y:2009:i:3:p:767-797

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0021-8456

Access Statistics for this article

Journal of Accounting Research is edited by Ray Ball, Philip G. Berger, Merle Erickson, Richard Leftwich, Douglas J. Skinner and Abbie Smith

More articles in Journal of Accounting Research from Blackwell Publishing
Series data maintained by Christopher F. Baum ().