Purpose
The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of restrictive covenants of public debt may affect accounting conservatism.
Design/methodology/approach
The sample is composed of non-financial firms and for each firm one debt contract is considered. The authors have used the Ball and Shivakumar (2005) models to test the relationships. All variables were retrieved from Mergent Fixed Investment Securities and COMPUSTAT Databases.
Findings
The findings of this study show that the more the firm relies on bond covenants, the higher is the degree of conservatism. The authors found also that these firms also exhibited a widely significantly increased level of conservatism in the years following the issuance of debt.
Research limitations/implications
The results should be interpreted with caution because the use of covenants does not take into consideration the tightness of their inclusion in the public debt contract.
Originality/value
This paper makes a timely contribution to the debate of timely loss recognition by confirming the complementarity between the inclusion of restrictive covenants in the debt agreement and the accounting conservatism before and after the emission of public debt.
The article explores individual approaches used to measure and evaluate the quality of financial state-ments: standardized assessment, accrual-based models (accrual quality), Beneise models (M-Score), in-dexes - the internal control method and the degree of accounting conservatism. The reason for the great dependence on the use of indirect measures (proxies for the quality of financial statements or stock prices) is that some of the qualities of financial statements are unobservable.
The objective of this study is to examine whether corporate governance influence the relation between accounting conservatism and Earnings Response Coefficient (ERC). The accounting conservatism proxy used in this research is accruals obtained from differences between net income and cash flow. Sample consists of 31 manufacturing companies that listed in Indonesian Stock Exchange since 20032006. Hypotheses are examined by using multiple regressions. The result shows that there is a negative influence of accounting conservatism to Earnings Response Coefficient. Managerial ownership as a moderating variable did not affect the relation between accounting conservatism and Earnings Response Coefficient, but independent board of commissioner composition as a moderating variable affected the relation between accounting conservatism and Earnings Response Coefficient.
Accounting Conservatism and Debt Contract Efficiency with Soft Information