Accounting Conservatism and the Efficiency of Debt Contracts

From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle

“…(To simplify exposition, we refer to a bank's loan to a non-reporting project as a ''non-reporting loan''.) This representation, suitably adapted to our discrete cash flow environment, is conceptually similar to most financial reporting models and means that financial reporting may provide a decision-useful advance signal on the quality of projects (Hughes and Pae, 2004;Gigler et al, 2009;Cheynel, 2010). Given that q t captures how much information is disclosed by firms, we will refer to it as ''reporting quality''.…”

Earnings restatements and differential timeliness of accounting conservatism

“…Individual studies documenting benefits of conservative financial reporting include Ahmed et al (2002), Francis et al (2004), Roychowdhury and Watts (2007), Beatty et al (2008), Chung and Wynn (2008), Guay (2008), LaFond and Roychowdhury (2008), LaFond and Watts (2008), Zhang (2008), and Gigler et al (2009). earnings restatements.…”

Conservative accounting as a signaling device in debt covenants

“…Another strand considers debt covenants in the form of an allocation of property rights over the assets contingent on accounting information (e.g., Gigler et al 2009;Chen and Deng 2010;Caskey and Hughes 2012;Fan and Zhang 2012;Gao 2013;Li 2013).…”

“…The signaling mechanism in their paper differs from that in the present paper. Gigler et al (2009) model a debt contracting setting with the liquidation decision of investments being contingent on an accounting signal. They focus on the informational properties of conservative reporting during contract execution.…”

“…I do not address capital structure decisions but assume debt financing of the investment amount I is needed (similar assumptions are used, e.g., inGigler et al 2009;Li 2013;Caskey and Hughes 2012). However, this assumption is not restrictive.…”