Debtholders' Demand for Conservatism: Evidence from Changes in Directors' Fiduciary Duties

Debtholders' Demand for Conservatism: Evidence from Changes in Directors' Fiduciary Duties

Debtholders' demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors...

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Bibliographic Details
Published in:Journal of accounting research Vol. 52; no. 5; pp. 993 - 1027
Main Authors: AIER, JAGADISON K., CHEN, LONG, PEVZNER, MIKHAIL
Format: Journal Article
Language:English
Published: Chicago Blackwell Publishing Ltd 01-12-2014
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Subjects:
Accounting
Analysis
board governance
Board of directors
Boards of directors
Business entities
Conservatism
Control variables
Court decisions
Creditors
Directors
Evidence
fiduciary duties
Fiduciary responsibility
Financial reporting
Fiscal restraint
G34
Incorporation
Insolvency
K20
Legal judgments
Literature
M41
near insolvency
Organizations
Stakeholder
Studies
Temporal currency
United States > US
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Summary:Debtholders' demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. In addition, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of the board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders' demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders' demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of the board of directors in financial reporting.
Bibliography:istex:29FDF336CA13E277E2019A34D2CCC193021EC0CA
ark:/67375/WNG-85WCZTZQ-C
ArticleID:JOAR12062
http://research.chicagobooth.edu/arc/journal‐of‐accounting‐research/online‐supplements
Accepted by Christian Leuz. We appreciate helpful comments from an anonymous referee, Ron Allen, Bill Baber, Augustine Duru, Keith Jones, Gopal Krishnan, Tao Ma, Xiumin Martin, Sarah Nutter, Sugata Roychowdhury, Partha Sengupta, Phil Shane, Min Shen, Anup Srivastava, Gnanakumar Visvanathan, Regina Wittenberg‐Moerman, Fei Xie, and workshop participants at American University, George Mason University, University of Illinois at Chicago, Suffolk University, and 2012 Virginia Accounting Research Conference. Long Chen acknowledges the summer research grants from George Mason University's Provost Office and School of Business. Mikhail Pevzner acknowledges the assistance of Ernst and Young Chair in Accounting at the University of Baltimore. We thank Larry Friedman and Hui Zhang for their insights on corporate law. An online appendix to this paper can be downloaded at
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ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12062