The contracting benefits of accounting conservatism to lenders and borrowers

In this paper, I examine the ex post and ex ante benefits of conservatism to lenders and borrowers in the debt contracting process. First, I argue that conservatism benefits lenders ex post through a timely signal of default risk in the form of accelerated covenant violations by more conservative borrowers. I present evidence that the likelihood of a covenant violation following a negative shock increases in borrower conservatism. Second, I argue that conservatism benefits borrowers ex ante through lower initial interest rates. I provide both in- sample and out-of-sample evidence that lenders offer lower interest rates to more conservative borrowers. The result is robust to controlling for a series of other earnings attributes.

Department dc:contributor.department

Sloan School of Management

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2005

Author dc:creator

• Zhang, Jieying, Ph. D. Massachusetts Institute of Technology

Advisor dc:contributor.advisor

• S.P. Kothari.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/33748

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/33748