Debt maturity and conservatism

Pao Yue-kong Library Electronic Theses Database

Debt maturity and conservatism

 

Author: Zhu, Xindong
Title: Debt maturity and conservatism
Degree: Ph.D.
Year: 2010
Subject: Hong Kong Polytechnic University -- Dissertations
Corporate debt
Financial statements
Department: School of Accounting and Finance
Pages: viii, 164 leaves : ill. ; 30 cm.
InnoPac Record: http://library.polyu.edu.hk/record=b2393070
URI: http://theses.lib.polyu.edu.hk/handle/200/5902
Abstract: In this thesis, I investigate the empirical relation between a firm's short-term debt and conservatism in financial reporting. As both are costly mechanisms to resolve the agency problem between the shareholders and the debtholders, I expect that they act as substitutes if managers choose them in a cost-effective way. I find a negative association between the change in short-term debt and in conservatism, which is consistent with the expectation. The result is robust to alternative measures of short-term debt and accounting conservatism. I further examine the individual and joint effect of short-term debt and conservatism on the firm's cost of debt. I find that the increase of short-term debt or of conservatism is associated with the decrease of the firm's cost of debt. More importantly, I find that short-term debt and accounting conservatism act as substitutes in reducing the firm's cost of debt. The results are robust after controlling for cross-sectional correlations, heteroscedasticity and autocorrelations. Overall, these results suggest that short-term debt and conservatism both act as monitoring mechanisms to resolve agency problem in terms of lower cost of debt and firms tend to substitute these two mechanisms in a rational cost-effective way.

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