Contracting and Reporting Conservatism around a Change in Fiduciary Duties*
Daniel Bens, Sterling Huang, Liang Tan, Wan Wongsunwai
Contemporary Accounting Research · 2020 · Volume 37 · Issue 4
Abstract
We exploit an influential 1991 Delaware court ruling to examine simultaneously two types of conservatism that play important roles in resolving creditor–owner agency conflicts: contracting conservatism and reporting conservatism. The ruling expanded managerial fiduciary duties in favor of creditors for Delaware-incorporated firms in the vicinity of insolvency. In those firms, following the ruling, debt contracts are less likely to include conservative adjustments to accounting numbers used for covenant compliance (i.e., contracting conservatism decreases), while public financial reporting becomes more conservative (i.e., reporting conservatism increases). The decrease in contracting conservatism is concentrated in firms that exhibit a greater increase in reporting conservatism, suggesting that reporting conservatism is more cost-effective in resolving agency conflicts. In addition, the substitution effect is more pronounced in firms facing greater business uncertainty and firms with greater board independence.
Keywords
contracting conservatism, reporting conservatism, debt contracting, fiduciary duties, prudence en matière d'élaboration des ententes, prudence en matière de communication de l'information, contrats d'emprunt, obligations fiduciaires, prêts basés sur l'assiette de financement, rapport chronologique, radiation
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