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| Author: | Zhang, J. |
| Title: | The contracting benefits of accounting conservatism to lenders and borrowers |
| Journal: | Journal of Accounting & Economics
2008 : MAR, VOL. 45:1, p. 27-54 |
| Index terms: | accounting principles contracts borrowing loans debt |
| Language: | eng |
| Abstract: | The study investigates the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process. It expects conservatism to benefit lenders ex post through the timely signaling of default risk, as manifested by accelerated covenant violations, and to benefit borrowers ex ante through lower initial interest rates. A sample of 327 firms is analyzed. Result reveal, among others, that more conservative borrowers are more likely to violate debt covenants following a negative price shock, and that lenders offer lower interest rates to more conservative borrowers. The higher likelihood of covenant violations and the lower interest rates shows that conservatism benefits both lenders and borrowers, enhancing the efficiency of debt contracting. |
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