Document Type

Article

Source of Publication

China Accounting and Finance Review

Publication Date

2-20-2023

Abstract

Abstract

Purpose – The purpose of this paper is to examine whether managers of bankrupt firms are more or less conditionally conservative in their financial reporting relative to non-bankrupt firms. The study further examines the cross-sectional differences in conditional conservatism among bankrupt and non-bankrupt firms. Design/methodology/approach – The study employs a sample of US firms to investigate conditional conservatism in firms that experience financial distress and go bankrupt relative to non-stressed non-bankrupt firms. The study also uses switching regression models to identify the drivers of the cross-sectional difference in conditional conservatism among bankrupt and non-bankrupt firms. Findings – Empirical results show that bankrupt firms are timelier in recognizing bad news than good news when compared to non-bankrupt firms. The higher level of conditional conservatism in bankrupt firms is mainly driven by their higher levels of leverage and tax-reduction incentives. The cross-sectional analyses show that these results largely hold for more leveraged firms and firms with higher tax costs. Taken together, these results suggest that the conservative tendency of managers of bankrupt firms can stem from the agency problem between lenders and managers and from tax-decreasing motivations. Originality/value – The novelty of the authors’ research stands in studying the drivers of the cross-sectional differences in conditional conservatism between bankrupt and non-bankrupt firms and specifically, the demonstration that taxation also induces conditional conservatism in the setting of ex post bankrupt firms.

ISSN

2307-3055

Publisher

China Accounting and Finance Review

Volume

25

Issue

1

First Page

23

Last Page

53

Disciplines

Accounting

Keywords

Bankrupt, Conditional conservatism, Contracting, Litigation, Regulation, Taxation

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Indexed in Scopus

yes

Open Access

yes

Open Access Type

Gold: This publication is openly available in an open access journal/series

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