Debt Contract Enforcement and Conservatism: Evidence from a Natural Experiment

• 成果类型: Article
• 署名作者: Aghamolla, Cyrus; Li, Nan
• 署名单位: University of Minnesota System; University of Minnesota Twin Cities
• 刊物名称: JOURNAL OF ACCOUNTING RESEARCH
• ISSN/ISSBN: 0021-8456
• DOI: 10.1111/1475-679X.12238
• 发表日期: 2018
• 页码: 1383-1416
• 关键词: timely loss recognition; accounting conservatism; reporting incentives; earnings management; RECOVERY TRIBUNALS; BANKING INDUSTRY; Public firms; Timeliness; PRIVATE; QUALITY

摘要

This study provides evidence that the use of conservative accounting in debt contracting depends on the enforceability of the contract. To test the effect of debt contract enforcement on borrowers' timely loss recognition, we exploit the staggered introduction of enhanced debt contract enforcement in Indian states as a natural experiment, where the implementation of the enforcement is exogenous to the accounting choices and borrowing behavior of firms. The main results show that enhanced enforcement has a significant positive effect on the timeliness of loss recognition of borrowing firms. We find that the effect is strongest for firms that increased their overall borrowing and for firms with high levels of tangible assets, consistent with a collateral-based explanation. This study also provides causal evidence that firms adopt conservative accounting due to lenders' demand.