Agency-based demand for conservatism: evidence from state adoption of antitakeover laws

Sudarshan Jayaraman, Lakshmanan Shivakumar

Review of Accounting Studies · 2013 · Volume 18 · Issue 1

Abstract

We use antitakeover laws passed by several states in the mid-1980s and early 1990s as an exogenous increase in agency conflicts and examine how these laws affect the demand for asymmetric timeliness of loss recognition (ATLR). Consistent with the debt-based contracting demand forATLR, we find an increase inATLRafter the passage of antitakeover laws for firms with high contracting pressures. These increases are incremental to those found in control firms that face similar pressures but whose states did not pass antitakeover laws. We do not find comparable changes inATLRfor firms with higher agency costs of equity. In contrast to the observed increases inATLR, we find no change in the short-window information content of earnings announcements. Overall, our results suggest that higher agency conflicts result in a heightened demand forATLRin financial statements but not for more forward-looking new information. Further, these demands seem to emanate from debtholders and not from equityholders.

Keywords

Asymmetric timely loss recognition, Conditional conservatism, Anti-takeover laws, Agency costs

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