Accounting Conservatism and Debt Financing

Abstract

For a sample of 26 non-financial listed Portuguese firms-years from 2002 to 2016, this paper study whether higher debt firms adopt more conservatism in the prior year to debt contract. We also analyze whether ex-ante conservative borrowers are rewarded with lower debt contracting costs. Further, we study whether firms with high debt issuance exhibit more conservatism accounting prior borrowing compared to those with low debt issuance. The empirical findings suggest that debtholders value conservatism and lend more debt and charge lower cost of debt to borrowers that report conservatively. In addition, the results indicate that firms with prior high debt issuance exhibit more conservatism accounting after borrowing compared to those with low debt issuance.

Keywords: Conservatism Accounting; Agency Cost of Debt; Contracting Debt Theory; Debt Financing; Debt Costs; Lenders

Australian Academy of Accounting and Finance Review, vol 5, issue 2, July 2019, pp 48-68