scholarly journals Accounting Conservatism

2021 ◽  
Author(s):  
◽  
Zhe Wang
Keyword(s):  
Construct Validity ◽  
Information Asymmetry ◽  
Default Risk ◽  
Potential Benefit ◽  
Accounting Conservatism ◽  
Empirical Measures ◽  
The Third ◽  
Economic Rationale ◽  
Signalling Theory ◽  
Debt Market

<p>This thesis provides an in-depth examination of accounting conservatism, which is one of the oldest and most important principles of accounting (Sterling, 1967;Watts, 2003a). Two main questions relating to accounting conservatism are extensively studied in this thesis: (1) How to measure accounting conservatism? (2) Why do firms adopt accounting conservatism? This thesis consists of three main chapters that answer these two questions from  three different perspectives. The first chapter studies the existing empirical measures of accounting conservatism from a construct validity perspective and concludes that construct validity of the existing measures is mixed to low. The second chapter examines the validity and bias in the Basu (1997) measure of accounting conservatism - one of the most widely used measure of conservatism in the accounting literature. The second chapter shows, analytically and empirically, that the Basu (1997) measure is biased upwards by the default risk of a firm, and proposes a new measure of conservatism that is free from this bias. This new measure of conservatism is called the "Default-Adjusted-Basu" measure. The third chapter investigates the economic rationale for accounting conservatism, and proposes a signalling theory for accounting conservatism. In a debt market characterized by information asymmetry, a borrower firm's degree of conservatism can serve as a credible signal about that borrower firm's level of operating  risk to the lenders in the debt market. Thus, one potential benefit of accounting conservatism is that it can reduce the degree of information asymmetry in the debt market.</p>

scholarly journals Accounting Conservatism

2021 ◽  
Author(s):  
◽  
Zhe Wang
Keyword(s):  
Construct Validity ◽  
Information Asymmetry ◽  
Default Risk ◽  
Potential Benefit ◽  
Accounting Conservatism ◽  
Empirical Measures ◽  
The Third ◽  
Economic Rationale ◽  
Signalling Theory ◽  
Debt Market

<p>This thesis provides an in-depth examination of accounting conservatism, which is one of the oldest and most important principles of accounting (Sterling, 1967;Watts, 2003a). Two main questions relating to accounting conservatism are extensively studied in this thesis: (1) How to measure accounting conservatism? (2) Why do firms adopt accounting conservatism? This thesis consists of three main chapters that answer these two questions from  three different perspectives. The first chapter studies the existing empirical measures of accounting conservatism from a construct validity perspective and concludes that construct validity of the existing measures is mixed to low. The second chapter examines the validity and bias in the Basu (1997) measure of accounting conservatism - one of the most widely used measure of conservatism in the accounting literature. The second chapter shows, analytically and empirically, that the Basu (1997) measure is biased upwards by the default risk of a firm, and proposes a new measure of conservatism that is free from this bias. This new measure of conservatism is called the "Default-Adjusted-Basu" measure. The third chapter investigates the economic rationale for accounting conservatism, and proposes a signalling theory for accounting conservatism. In a debt market characterized by information asymmetry, a borrower firm's degree of conservatism can serve as a credible signal about that borrower firm's level of operating  risk to the lenders in the debt market. Thus, one potential benefit of accounting conservatism is that it can reduce the degree of information asymmetry in the debt market.</p>

Conditional Conservatism and Audit Fees

2014 ◽  
Vol 29 (1) ◽  
pp. 83-113 ◽  
Author(s):  
Hye Seung (Grace) Lee ◽  
Xu Li ◽  
Heibatollah Sami
Keyword(s):  
Corporate Governance ◽  
Potential Benefit ◽  
Audit Fees ◽  
Accounting Conservatism ◽  
Audit Risk ◽  
Debt Contracting ◽  
Conditional Conservatism ◽  
Governance Quality ◽  
Corporate Governance Quality ◽  
The Impact

SYNOPSIS In this study, we examine the impact of conditional conservatism on audit fees and, more importantly, the influence of corporate governance on this relationship. Prior literature presents evidence regarding explanations for the existence and pervasiveness of accounting conservatism such as compensation and debt contracting, shareholder litigation, taxation, and accounting regulation. However, there is very limited evidence or discussion of the potential benefit of accounting conservatism on audit risk and thus audit fees, and how the potential benefit can be attenuated by corporate governance quality. Using a sample of firm-year observations over the period of 2004–2009, we provide evidence consistent with conditional conservatism and firms' commitment to such conservatism reducing their audit fees. However, our evidence shows that this reduction in audit fees is moderated by higher corporate governance quality. These results have implications for auditors, regulators, standard setters, and firms' managers. In addition, our study extends the literature on the determinants of audit fees. JEL Classifications: M41; M42; D81; D22.

scholarly journals Media Coverage and the Cost of Debt

2019 ◽  
Vol 55 (2) ◽  
pp. 429-471 ◽  
Author(s):  
Haoyu Gao ◽  
Junbo Wang ◽  
Yanchu Wang ◽  
Chunchi Wu ◽  
Xi Dong
Keyword(s):  
Information Asymmetry ◽  
Media Coverage ◽  
Default Risk ◽  
Cost Of Debt ◽  
Yield Spreads ◽  
Negatively Associated ◽  
Economic Mechanisms ◽  
The Cost ◽  
Yield Determinants ◽  
Firm Attributes

This paper investigates the relation between media coverage and offering yield spreads using a comprehensive dataset of 5,338 industrial bonds issued from 1990 to 2011. We find that media coverage is negatively associated with firms’ cost of debt. This association is robust to controlling for standard yield determinants, different model specifications, and endogeneity. We identify 4 economic channels through which media coverage influences the cost of debt: Information asymmetry, governance, liquidity, and default risk. Importantly, media coverage has an independent influence beyond the effects of these economic mechanisms and is not a proxy for other firm attributes.

scholarly journals Debt market illiquidity and correlated default risk

2018 ◽  
Vol 26 ◽  
pp. 266-273
Author(s):  
Siamak Javadi ◽  
Mohsen Mollagholamali
Keyword(s):  
Default Risk ◽  
Debt Market

Does financing behavior of SME entrepreneurs of Bangladesh follow capital structure theory?-an investigation into Pecking Order Theory

2020 ◽  
pp. 2050037
Author(s):  
Md. Rostam Ali ◽  
Rustom Ali Ahmed ◽  
Rushafa Tasnim Tisha ◽  
Md. Ashikul Islam
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Order Theory ◽  
Bank Loan ◽  
Structure Theory ◽  
Primary Data ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Debt Market ◽  
Capital Structure Theory

This study attempts to investigate whether the financing preferences of small and medium enterprises (SMEs)’ entrepreneurs of Bangladesh follow capital structure theory by investigating into Pecking Order Theory (POT). For this study, cross-sectional primary data have been collected through questionnaire. The answers of the questions have been measured through five points Likert Scale. The scores were analyzed using mean score. To analyze the data, some descriptive statistics have been used. Besides, one sample one tail [Formula: see text]-test has been applied to test the hypotheses. The study finds that the entrepreneurs themselves do not believe that there is an information asymmetry in debt market. But their perception regarding debt market ascertained the presence of the information asymmetry between SME sector (entrepreneurs of SME) and the debt market (banks). The answers of respondents are statistically significant that they want to use the retained profits first, bank loan as second and want to issue external equity (taking partner/s) as a third option among these three alternatives of additional financing. This tendency of the respondents towards financing is consistent with POT. Therefore, Government policy for motivating SMEs to keep formal accounting should be introduced to reduce the information asymmetry in debt market along with taking proper initiatives to increase accessibility of SMEs to institutional credit.

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