Author's School

Olin Business School

Author's Department/Program

Business Administration


English (en)

Date of Award

January 2010

Degree Type


Degree Name

Doctor of Philosophy (PhD)

Chair and Committee

Richard Frankel


I examine the role of accounting conservatism in the debt market and equity market. In the first essay I examine whether post-borrowing accounting conservatism is related to initial debt-covenant slack. I find firms with low debt-covenant slack display a smaller increase in conservatism after borrowing compared to firms with high debt-covenant slack. I further find that this relation is more pronounced when the cost of debt-covenant breach is greater and is less pronounced when lenders have stronger monitoring incentives. This study supports the debt covenant hypothesis. The second essay investigates the impact of financial market competition on a firm's choice regarding accounting quality: co-authored). The estimates indicate that foreign bank entry is associated with improved accounting quality among firms, and this improvement is positively related to a firm's subsequent debt level. The increase in accounting quality is also greatest among private firms, smaller firms, less profitable firms, and firms more dependent on external financing. The third essay investigates whether conditional accounting conservatism has informational benefits to shareholders: co-authored). We find some evidence that higher current conditional conservatism is associated with lower probability of future bad news. We also find weak evidence that the stock market reacts stronger: weaker) to good: bad) earnings news of more conditionally conservative firms. Thus, we provide additional evidence that conditional conservatism affects stock prices.


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